“For several years, you have posted my paper, “Winners and Losers of the Zero-Sum Game,” on your website at https://www.turtletrader.com/zerosum/. I am amazed by the number of your clients who contact me to inquire further about the topics it addressed…I incorporated this paper into a recently published book. Trading and Exchanges: Market Microstructure for Practitioners is a plain language introduction to all aspects of trading.”
— Lawrence Harris, Fred V. Keenan Chair in Finance, Marshall School of Business, University of Southern California
TurtleTrader Review
Professor Larry Harris’s “Trading and Exchanges” is as comprehensive a book about the markets and trading as you are going to find. The writing reveals the pragmatism and logic of someone who has honed his intellect with years of real world experience as a consultant to traders, banks, exchanges and regulators, but who has also performed in the trenches as a teacher in classrooms of students who do not suffer fools gladly.
At over 600 pages, this book is a long read, but it is organized so that you can flip to any topic and be certain of in depth coverage and accessible explanations supported by graphs and tables. Harris touches on just about every aspect of market economics, structure and regulation, from the players (speculators, arbitrageurs, bluffers, you name them), to the game (zero sum, liquidity, volatility, performance evaluation, portfolio management and more). This book is an objective, and more important, practical survey of an area of financial economics that has become increasingly, and needlessly, complex.
Each chapter begins with a content overview and ends with a summary, points to remember and questions for thought, a structure that will appeal to those readers who are studious by nature. In fact, the book works extremely well as the text for the introductory markets class that Harris taught for years at the Marshall School of Business at the University of Southern California. However, Harris sustains his straightforward, efficient approach with just enough of a “light touch” so you don’t get too bogged down in technical jargon.
For example, in “Trading Stories”, an early chapter comprised of routine trade case histories covering stocks, bonds, futures contracts, and currencies, Harris warns you to gloss over “the institutional details” and just “get a feel for what trading is all about”. This sound advice about how to process the book’s content is one reason why readers describe Trading and Exchanges as “accessible,” and it runs throughout the book.
By limiting his examination of economic issues in trading to an understanding of liquidity, transaction costs, informative prices, volatility and trading profits based on facts and hard data, Harris keeps us on the straight and narrow. We are unable to drift into that disingenuous and murky world of trading advice based on personal success, or failure in the markets. There is almost no mention of individuals by name. However, case history examples abound such as Harris’ “on point” use of Nick Leeson and Barings Bank to exemplify a rogue trader in his detailed breakdown of types of traders.
Harris does not focus on the topic of trend following per se, although he does spend time on zero sum and changing markets, two concepts underlying the trend following method. His 1993 paper, “The Winners and Losers of the zero-Sum Game: The Origins of Trading Profits, Price Efficiency and Market Liquidity” has long been posted on TurtleTrader as required reading. In Trading and Exchanges Harris fleshes out his earlier study by devoting even more thought to some crucial tenets of zero-sum.
Whether you are a novice or veteran investor, trader, dealer or broker, Trading and Exchanges cracks the code on practically every facet of market microstructures. It is a trading bible.
Larry Harris’ Trading and Exchanges at Amazon.com.
Why This Book Matters for Trend Following Traders
The zero-sum framework is the intellectual foundation that connects Harris’s academic work to the trend following approach. Every trade has a counterparty. Every dollar of profit comes from another participant’s loss. Harris’s 1993 paper, posted on TurtleTrader for years before the book was published, traced where trading profits actually originate and why some participants consistently win while others consistently lose. That paper attracted significant attention from TurtleTrader readers, enough that Harris noted the volume of inquiries it generated when he wrote to announce the full book.
The book’s treatment of liquidity is directly relevant to systematic traders. A trend following system that enters a position early in a trend, before the move is widely recognized, is providing liquidity to the market at that moment. As the trend develops and other participants recognize it and demand liquidity to enter, the early trend follower is on the profitable side of that liquidity provision without having designed it that way. Understanding how liquidity creation and consumption work in different market structures helps a systematic trader evaluate which markets and time frames their approach works best in and why.
The market microstructure chapter on transaction costs is equally valuable. A trend following system with strong theoretical edge can be rendered unprofitable by excessive transaction costs, particularly in illiquid markets or at small position sizes. Harris’s systematic treatment of how bid-ask spreads, market impact, and brokerage costs interact with a trading system’s frequency and position size provides the framework for evaluating whether a given approach is viable after realistic transaction costs are included. This is the analysis that separates a system that works on paper from one that works in a real account.
Harris’s taxonomy of market participants — dealers, brokers, proprietary traders, arbitrageurs, informed traders, uninformed traders — is the structural map that answers the question every trend follower should ask: who is on the other side of my trades, and why? Understanding that counterparties include noise traders acting on emotion, hedgers seeking price certainty, and institutional traders forced to act by mandate rather than conviction explains why the opportunity the trend follower exploits is persistent and structural rather than temporary.
Frequently Asked Questions
What is Trading and Exchanges about?
It is a comprehensive 600-page introduction to market microstructure covering every aspect of how markets actually function: the participants, the mechanics of trade execution, liquidity and transaction costs, informative prices, volatility, and the economics of trading profits. Written by Professor Lawrence Harris of USC’s Marshall School of Business, it is used both as an academic textbook and as a practical reference for traders, dealers, and market professionals.
What is Harris’s “Winners and Losers of the Zero-Sum Game” paper?
A 1993 academic paper by Lawrence Harris that traces the origins of trading profits, price efficiency, and market liquidity through the zero-sum framework. It answers the question of where trading profits come from and why some participants consistently capture them while others consistently provide them. The paper has been hosted on TurtleTrader as required reading and was subsequently incorporated into Trading and Exchanges.
Why is market microstructure important for trend following traders?
Because understanding how markets function at the structural level explains why trend following works, where it works best, and what its limits are. The zero-sum nature of markets, the liquidity dynamics that produce sustained price movements, the transaction cost structures in different markets, and the taxonomy of market participants who provide the opportunity the trend follower captures are all microstructure concepts that inform better system design and more realistic performance expectations.
Is Trading and Exchanges accessible to non-academic readers?
Yes. Harris specifically designed the book to be accessible to practitioners without an academic economics background. Each chapter begins with a content overview and ends with a summary and key points. Case histories ground abstract concepts in real market events. The book avoids the jargon-heavy style of academic finance while maintaining the rigor required for genuine understanding.
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