Who else is trading in the market
The market isn't a single opponent. Many different participants trade there, with quite different goals, sums and time frames. Knowing that helps you understand many moves better.
Learning objective: After this lesson you can name the main groups in the market and explain how they influence price moves.
When beginners talk about the market, they often picture a single opponent. In reality very different people trade there at the same time, with very different intentions.
Who Trades in the Market
A private investor invests their own money, usually on the side and often for years. A day trader opens and closes positions on the same day. An investment bank or trading firm uses the firm's money, usually with fixed risk limits and lots of technology in the background.
Funds and Pension Plans
A hedge fund manages investors' money and follows a particular strategy it markets itself with. A pension fund or asset manager invests for the very long term and broadly spread, often under legal requirements. A market maker constantly quotes buying and selling prices and earns from the gap in between. The direction of the price hardly matters to them.
Central Banks and Companies
Two groups are often missing from such lists: central banks and the companies themselves. A central bank doesn't buy bonds or currencies to make a profit. It wants to steer interest rates or the exchange rate, and because of the huge sums it often moves whole markets. A company becomes a buyer in the market when it buys back its own shares. Then there are fewer shares in circulation, and that can support the price regardless of how the business is doing.
What's important is what doesn't follow: there's no single method all professionals use. The groups differ so much in time frame, source of money and risk limits that a shared formula for success can't exist.
You can tell the groups apart by four features. Whose money is used: their own, the firm's or clients'? For how long: seconds or decades? How strict are the risk limits: loose or monitored daily by a regulator? And how is success measured: by absolute return, by the gap to a benchmark index or by the spread without any directional risk?
Legal Limits
Large investors such as pension funds often have to stick to legal limits, for example a maximum share of stocks or minimum ratings for bonds. If a bond slips below that rating, many have to sell it at the same time. That explains some behavior that has nothing to do with their view of the market. It's simply the rules.
Speed as an Edge
Market makers and high frequency traders earn from the spread and from trading venue rebates. Their advantage is speed and a view into the order book in millionths of a second, not better judgment about the future. As a private investor you can't sensibly compare yourself with them. They run a different business, not a faster version of yours.
Without a Return Target
Central banks and companies don't fit this grid, because they don't follow a return target. A central bank buys bonds to make its policy rate reach the economy, or intervenes in the currency market when its own currency seems too strong or too weak. Its sums often exceed those of any private participant many times over. Companies buying back their own shares increase demand and make profit per share rise purely arithmetically, even if total profit stays the same.
| Retail investor | Day trader | Hedge fund | Market maker | |
|---|---|---|---|---|
| Capital source | own money | own or firm capital | client funds | firm capital |
| Typical time horizon | years to decades | minutes to hours | weeks to years | seconds |
| Success measure | reaching own goals | absolute profit | return versus benchmark | spread, regardless of direction |
| Risk limits | self-chosen | mostly informal | contractual and regulatory | strict, automated |
| Main edge | time and low cost | none, empirically usually a disadvantage | capital size and access | speed |
Market participants compared
Retail investor
Day trader
Hedge fund
Market maker
Summary
- Many groups with different goals trade in the market, not a single opponent.
- There's no single method all professionals use.
- Market makers earn from the spread, not the direction. They run a different business.
Did you get it?
What does a market maker mainly earn from?
From the gap between buying and selling price, not from the direction of the price.
Why do pension funds sometimes all act the same way at once?
Because of legal investment limits they have to follow, and not necessarily because of their view of the market.
Is there a shared method for success among all professionals?
No. The groups differ too much in time frame, source of money and risk limits.
Check your understanding
Your task
Pick three groups of market participants from the lesson and write down for each the time frame it looks at and where its money comes from. Then explain in two sentences why, as an individual investor with a ten year horizon, you cannot simply copy the method of any of these groups.
Sources and further reading
- The European Central Bank publishes the ongoing holdings of its bond-buying program (APP), showing the scale at which central banks act as market participants. View source ↗
Related
- Capital preservation before profitStage 3
- Evaluating sourcesStage 4
- Reading a chartStage 4
- Matching questions for this stageQuestions