The advancement of information technology has elevated the financial markets to an extraordinary level of international trade. As a result, the importance of the financial sector in each and every country around the world now has a more pivotal role in economic growth and networking, and financial accord between nations has become a necessity.
Such a high level of interaction allows participants to engage in trading the financial markets, leading to financial trading becoming one of the most competitive arts to master. The global markets are now an eclectic mix of financial assets with forever fluctuating prices. Ambitious traders should always be aware of competition, so what type of market participants are there competing for price and profit?
Financial institutions are perhaps the most active traders in the markets. This is because it incorporates many types of institutions who actively trade huge amounts of capital each and every day. The financial institutions include the likes of retail banks, investment banks, hedge funds and pension funds who take large positions in the marketplace with the hope of making large returns over a long time period. Together they account for over 70% of open interest in the markets today, and as such are considered to have strong influence in moving market prices.
Hedgers should also have an important mention. They hold a large percentage of wealth in the marketplace but do not trade specifically for ‘trading profit’. Their aim is protection. For a quick example consider a construction company that builds bridges. The key commodity is steel and they must protect themselves from possible large price swings of their primary resource. Hedgers can trade in the financial markets to lock in prices at several dates in the future to protect the construction company from volatility.
Financial institutions trade for profit. Central banks trade for policy, and are simply colossal contributors to price change. In a bid to tackle financial instability, inflation and unemployment their mandates to reinforce trust and confidence in the monetary system often involve heavy market participation. Quantitative easing and zero interest rates are two recent examples implemented by central banks which have most definitely had a massive impact on market prices and trading decision. Implementation of such policy can mean massive amounts of wealth entering or leaving the market and as a result usually causes massive price swings.
As central banks extend their policies, federal governments share involvement in financial trading, whether directly or not. A government’s decision to go to war, enforce economic sanctions or develop tax reform are all common examples where markets have made significant moves. It is important to note that shifts in policy without notice can cause drastic change to market prices, risk management is therefore a required means of protection for global traders.
And finally, speculators, you might ask yourself; ‘well who is a speculator!?’ Well the truth is… anyone who wants to interact via financial trading to attempt to profit from price. This could be a professional in a proprietary trading house in London, or it could be any one of us sitting at home in our living room willing to assume risk to make profit. We know there is opportunity, it is all around us, but we must respect it, and be shrewd in application of our skills and analysis, through our strategy. For the speculator there is never a right or a wrong answer, just profit or loss. It is the challenge that the speculator takes on that affords him the same opportunities as the financial institutions to profit from financial trading.