Understanding the Players in the Market

There are various participants in the financial markets, each with their own objectives and individual characteristics. Since trading is a zero sum game, it is important to know who could be on the other side of your trade and what their intentions are.


Let’s explore the various players in the market and how this can affect your trading.




The 4 Main Types of Market Participant

Hedgers, speculators, market makers, and institutions are the four mains types of market participants. Let’s dive a little deeper into each one.




Speculators are obviously the most common market participant, since everyone wants to make money, and most traders fit into this category. 


Speculation has been a part of markets since the dawn of exchanges, and speculators in fact provide a service of liquidity for other participants, as well as helping to keep markets in line (e.g. selling when prices are too high or buying when prices are too low).


The most common type of speculator is the retail trader, which with the accessibility of technology and cheaper trading costs, has resulted in a huge growth of such trades. In some sense, retail traders actually have a slight advantage over other market participants. We have written about this in our article The Advantage of The Small Trader.


Hedge Funds are another example of speculators, albeit much larger and more sophisticated. These speculators manage the capital of their investors with the sole aim of beating the market. 





Hedging is a trade with the intention of reducing risk of adverse price movements in the same or related assets. 


A hedge can be executed by simply buying or selling the same amount delta exposure in a particular trade, or can be done with more complicated strategies such as buying/selling a correlated asset or trading other derivative products such as options. 



Market Makers


Maker makers are entities (usually algorithms) that post liquidity on both sides of the market in an attempt to earn the spread without a directional bias. Some market makers have mandates to always support the market with liquidity, but in some markets they are there like speculators, and will leave the order book in times of market volatility.




Institutions are large entities such as banks that undertake relatively sizable trading operations, often across a vast range of asset classes.


But they are not always for-profit entities, and central banks are an example of such an institution. They have no customers and their sole responsibility is the stability of the financial markets within their jurisdiction through monetary policy. Despite the fact they are not looking to simply make a profit, the fact they are so large, their operations can have a huge impact on financial markets.



Investment banks are an example of another large but purely for-profit banking institution. As well as taking directional trades, they also provide solutions and function as middlemen in complex agreements such as initial public offerings (IPOs) or company mergers. They could also execute traders or act as financial planners for big corporate investors like pension funds.


Another example of an institution (albeit slightly smaller than the previously mentioned entities), proprietary trading firms, sometimes referred to as prop firms, are essentially groups of traders that try to directly profit from market fluctuations. These firms usually receive discounts from their brokers as they trade  high volume.


They also may even have access to the same research that the other big institutions provide.




Participant Differences Across Markets




Futures were originally developed as an insurance product for producers to hedge price risk, and to this day are the main instrument of hedgers.


There are three main types of hedgers in the futures markets; buy-side hedgers: who are more concerned about rising commodity prices. Sell-side hedgers: concerned about falling commodity prices, and finally merchandisers: participants that are both buyers and sellers of commodities. 


For hedgers, risk is defined not as directional change in price, but the spread or between the purchase and sale price of the asset that determines their profitability.


Of course, without someone on the other side of their trade, there would be no market. Both speculators and market makers take a large portion of the market, too. 


Speculators love futures because they are leveraged products, which makes them easier to trade. With the inclusion of new micro futures products, speculation on futures is accessible even for the smaller of retail traders. 


Market makers are big on futures for similar reasons, too. The fact that there are so many markets, expiries, and high buy-side demand, market making in futures can be a very profitable endeavour indeed. 






The stock market is similar to futures, except it is likely to have more longer-term investors that may only rebalance their portfolios every 3-12 months. This can slightly change the characteristics of the stock’s order flow due to their time horizons. These investors—a subsection of the speculators class—will also put more importance-weighting on fundamental factors such as earnings reports and general underlying economic conditions.


Also, in the stock market, market makers usually have a mandate to provide liquidity at all times, unlike in some other markets.




The crypto market is mostly dominated by speculators, most of whom are retail traders (often called ‘HODLers’).This is to be expected, since the entire space itself is the newest in the financial markets as a whole. 


The few whales that are in the market have more control, however this is changing as more and more institutions enter the market, making the entire space larger overall, and making it more difficult for any single entity to have a large influence over price.


As far as market makers go, they don’t have to provide liquidity, since crypto is largely unregulated. Sometimes liquidity comes from the exchange itself, which can be either a common practice of providing liquidity or the more ominous act of “wash trading”.




What are the Intentions of the Main Market Players?

Speculators: Make A Quick Profit


Speculators have one thing in mind: to make a profit, preferably as quickly as possible. It is important to be aware of speculators’ intentions, since they have a direct impact on prices, often using aggressive market orders or following momentum (although this of course depends on the individual strategy).


Speculators also often use leverage, which means they can fuel large price movements when they are caught on the wrong side of the market, leading to order flow phenomena such as liquidations.


Hedgers: Manage Price Risk


Most individuals or firms that buy or sell a real tangible asset at scale will also usually partake in some form of hedging activity in the financial markets. Many hedgers are makers, distributors, merchants, or makers that are impacted by changes in costs such as commodity prices or currency and interest rate movements. Fluctuations in these costs can influence a company’s bottom line when it brings items to market. 


For these reasons, hedgers will utilise futures contracts to lock in revenues. In contrast to speculators who take on market risk to profit, hedgers utilise futures markets to control their risks.


Hedging can also be thought of as an attempt to reduce the volatility associated with price of the specific asset in question. This is usually done by ensuring that the delta of a position’s exposure is close to zero. In other words, to reduce the price direction risk as much as possible. 


Market Makers: Earn The Spread


Market makers are trading businesses that often (depending on the market) have legal obligations to provide liquidity on both sides of the markets. Some market makers will earn a rebate for this service. 


Market makers are essential to the trading ecosystem because they provide liquidity, allowing for relatively large transactions to execute without causing dramatic changes in price. Market makers frequently benefit by capturing the spread across many transactions.




As mentioned earlier, institutions are the whales of the market. They huge size makes them important because they can have a large impact on the market. 


Institutions also tend to invest a lot of capital into research, therefore are considered some of the smartest players in the market.


There are two mains types of institutions with very different intentions, those being:


  • Investment Banks & Props Firms: Make a Quick Profit or Earn the Spread



Investment banks usually manage a large portfolio with a number of assets, often across classes. Prop firms are usually made up of individual traders that trade their own accounts, all of which make up the overall profitability of the firm.


As mentioned, there are many different types of strategies that can be utilized by investment banks and prop firms. Although investment banks may sometimes use fundamental strategies such as underwriting IPOs, whereas prop firms are usually what we think of as day traders. That being said, both investment banks and prop firms can also use market making strategies in an attempt to generate alpha. 


  • Central Banks:  Control Inflation



A central bank is a financial institution that oversees and manages other banks. 


According to the IMF, a key role of central banks is “to conduct monetary policy to achieve price stability (low and stable inflation). 


Central banks have various tools at their disposal for this. For example, when the central bank wants to lower inflation in their local economy, it will sell government bonds to the open market, increasing interest rates and discouraging borrowing.


Central banks are probably the biggest players in the market, since they are not exactly like for-profit organisations like the other players. For this reason, they don’t have the same constraints.





Understanding the various market participants and their intentions is vital when developing a trading strategy. After all, since financial markets are a zero sum game, every transaction has two participants: a buyer and a seller. If you don’t know why someone would want to take the other side of your trade, then you are missing a big piece of the puzzle.


Essentially, there are 4 main types of players: speculators, hedgers, market makers, and institutions. Within each class of market participant, there are multiple other subclasses of participant. But starting with this framework can help you to conceptualize who you coiuld be trading with.


If you want to learn more about market participants, why not join our Discord channel? It’s free, and we chat about trading all day, every day.


Also sign up and try the Bookmap platform for free today.







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$NVDA short setup. NVDA reverses lower at the 125 @spotgamma Hedge Wall as sellers absorb buyers, traders buy puts, and market makers sell stock to hedge delta exposure. Market maker hedging flow shown by Bookmap/SpotGamma HIRO. Setups and target shown on @bookmap_pro chart.


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