Every trade has two sides, and before costs the gains of one side are the losses of the other. William Sharpe set out the arithmetic in "The Arithmetic of Active Management" (Financial Analysts Journal 47(1), Jan/Feb 1991, 7–9): the average actively managed dollar must earn the market return before costs, so after costs it must earn less. For a derivatives market, where every contract is a promise between two parties, the arithmetic is even stricter. Ignoring the risk premium on the underlying, the gross profit and loss on all open SPX options, E-mini futures and VIX futures sums to zero, and fees, spreads and taxes make the total negative. Yet a small number of trading firms earn very large, steady profits. Reuters reported in April 2026, from documents and anonymous sources, that Jane Street made ~$39.6bn of net trading revenue in 2025, a record. Part of that reportedly came from revaluing private stakes, including Anthropic. Hudson River Trading reported ~$12.3bn and Citadel Securities ~$12.2bn (up ~25% on 2024). None of the firms confirmed the figures (Shared facts). On the other side of many of the same kinds of contracts, India's regulator SEBI found that ~89% of individual equity futures-and-options traders lost money in FY22, and 93% of 1.13 crore individuals over FY22–FY24 cumulatively (SEBI press release 37/2024, 23 Sep 2024; the FY22 figure is from an earlier SEBI study — verify). Both facts hold together because trading profit is not luck spread evenly. It is a transfer, and it flows in predictable directions. This section names the five sources of edge: (1) risk premia paid for bearing risk others want to shed; (2) behavioural mispricing; (3) structural and flow edges; (4) information and analysis; (5) speed and liquidity provision. For each it asks who is on the other side and why they keep paying. It then grades the evidence that most active traders lose, and the narrower evidence that some win. The companion worked example builds a stylized market of four trader types and follows where the money goes in a year.
What the study covers
- 1Overview: a transfer, not a harvest
- 2Units and definitions
- 3The arithmetic of trading
- 4The five sources of edge
- 5Who is on the other side
- 6The evidence that most active traders lose
- 7The evidence that some win
- 8Decay, capacity and crowding
- 9Europe and the rest of the world
- 10How to read claims of edge
- 11Key numbers
- 12Landmark firms and cases
- 13Pitfalls
- 14How an expert thinks about it
- 15Glossary
Technical exhibits
Worked examples, checklists and case studies included with this study.
Four Trader Types Money Flows Worked Example
A stylized index-derivatives market for one year with four groups (hedgers, retail speculators, systematic funds and market makers) plus the venues and brokers that charge them. It traces each transfer (risk premium, spread, adverse selection, lottery overpayment, behavioural flow), shows that gross P&L sums to zero and net P&L to the fee bill, and shows how often a retail trader with no edge still wins in a single year and how rarely over five (computed in Python)