A guide to understanding key market participants

Who's involved in trading? 📈

Trading the financial markets involves interacting with various individuals and entities known as market participants. These participants play different roles, all crucial to the functioning of financial ecosystems.

✅ Importance? As a retail trader, understanding who these players are, their functions, and how you relate to them can enhance your trading experience.

Step 1: Meet the market participants 🔍

Here are examples of specific market particpants: 

• Retail Traders: Individual investors trading shares
• Brokers: Full-service, advisory, execution-only brokers
• Broker-Dealers: Firms like Goldman Sachs, JP Morgan
• Institutional Traders: Banks, hedge funds, pension funds

Step 2: Distinguish brokers from broker-dealers ⚖️

While brokers focus on executing trades and facilitating access for retail traders, broker-dealers also engage in trading for their own accounts. This dual role allows broker-dealers to benefit from market movements themselves.

Step 3: Explore trading methods 📊

There are two main ways to trade financial instruments:

🔹 On exchange

Trading occurs on formal exchanges like the Australian Securities Exchange (ASX). These have central locations and facilitate trades either in person or electronically.

🔹 Over-the-counter (OTC) markets

Used for trading non-listed instruments like forex pairs. These are virtual networks without physical locations, where dealers set prices privately.

Step 4: Understand the role of market makers 🌏

Market makers play a key role in maintaining market liquidity by overseeing the following:

• Quote continuous buy and sell prices
• Hold inventories
• Ensure transactions occur smoothly, even without direct matching counterparties.

Step 5: How do institutional traders impact markets? 💱

Institutional traders, such as banks and superannuation funds, manage large portfolios and significantly impact market dynamics through their substantial trading activities. 

Step 6: Explore a rapid approach 🕒

High-frequency trading uses computers to automatically apply trading strategies and algorithms, finding and exploiting patterns, trends and tiny fluctuations in the market. Instead of employing teams of analysts and traders, an HFT firm relies on technology that can make multiple trading decisions in a fraction of the time it takes a human brain.