Chapter 2. Participants of financial market In the financial markets, there are more topics to consider, than it may seem at first glance when you open a trading platform and enter your orders. Various entities in the financial market also have completely different approaches and purposes for operating in the financial market. To correctly understand the entire financial market, you also have to know other participants in the global financial market. Retail traders – These are speculators. You and your friends probably fall into this category, along with many other traders who are reading this text. In the financial market, retail traders operate to invest their capital and their main goal is profit. Retail traders typically trade over the trading platform QUIK, MetaTrader, Wealth-Lab, TSLab, or through other specific platforms or technology solutions from their broker. Retail traders in the financial market are trading via a provider, called a broker. Profitability of traders depends on their trading strategy, money management, experiences and also how fair and solid their broker is, and it can vary considerably from 10% to 50%. According to the statistics, the higher the trader's capital, the higher success rate he is usually able to achieve because he is better at managing risk. Brokers. Their goal is to provide trading to their clients and provide access to financial markets. For executing their clients' trades, the broker usually gets a commission. In the world, there are hundreds of brokers with very different approaches to their clients. The fact is that the vast majority of retail traders lose their capital in the financial market, and many brokers put their own profits ahead of creating a profitable trading environment for their clients. Many brokers therefore, chose dishonest and dirty practices that accelerate the loss of their client's capital, and they directly benefit from the losses of their clients (a fair broker would only profit from a spread or commission and not from clients' losses). This is how a lot of all brokerage companies in the world are run. In any educational materials about brokers and trading, you will read about two types of brokers:
Dealing desk (market maker) - market makers act like a counterparty for all your trades – and if you have a loss, the market marker earns same amount of money, and vice versa.
No dealing desk - ECN and STP, which send your trades further into the market for execution. In fact, there are three types of brokers:
Dealing desk - market maker, these brokers do not hide the fact that they act like a counterparty to all your trades.
ECN / STP own or have a contract with only one market maker, which act like a counterparty to all your trades and there is a high conflict of interest as in the first case.
ECN / STP that are Direct Market Access brokers who actually send all your trades for execution to the interbank market without any conflict of interest.
Traders also often ask us what information about them their broker sees.
Brokers can see all your orders, either at market prices or pending orders, Stop-Loss and Profit- Target (if you type it in the trading platform on the server of your broker). Your broker, of course, can see a complete history of your trades and can tell if you entered a trade manually, by an automated trading system, or over the phone. Your broker does not see your trading strategy or a code of an automated trading system in the trading platform MetaTrader 4. Central banks - the action of central banks and governments are also very important to us. Central banks provide stability of relevant countries by controlling reserves of cash. Central banks are top institutions of banking supervision and determine monetary policy in the country. The Central Banks perform the following functions:
Realization of monetary policy
Supervises the other banks
Determine exchange rate
Emit (issues) cash (notes and coins) in circulation
Maintains an account of the national budget
Manage foreign reserves
Commercial banks have their accounts at Central Banks The main tool of central banks is the interest rate, from which rates by commercial banks are set. By raising and lowering interest rates, the central bank de facto controls the country's economy and causes severe movements in the financial market. If we look at the distribution of central banks, depending on who is the owner, we find that there are three groups. Central Bank (CB) in private ownership (an example is - Switzerland or the USA), many other CB are in the hands of the state and the last option is called mixed ownership (eg. Japan). Banks. They handle Forex transactions in high volumes that often determine the future movements of financial markets. Currently, the five largest banks in the world hold almost 55% of the order volumes of the financial market. The minimum transaction in the interbank platforms is 10 million, the equivalent of 10
lots. Banks, of course, are trading without leverage, and utilize a variety of trading strategies from High Frequency Trading, latency trading, and arbitrage trading to long-term trading strategies.
The largest interbank platforms are EBS and Reuters and other interbank platforms are Integral, Currenex, Hotspot, Liquid-X, 360-T, and LavaFX. Banks in the financial market make their biggest profits not from their own speculations, which are of course also a part of their portfolio, but from an execution of transactions for their worldwide corporate customers (car companies, technology companies, pharmaceutical companies, and all corporations that are doing business internationally). Trades of corporate clients are executed according to the Reuters benchmark, which is the current market rate at 16:00 London time. Trillions of dollars in portfolios of money managers and investment funds are valued by this benchmark. According to our information, bank traders on corporate transactions of 800 million USD thanks to his insider information about the transaction can earn up to an additional 2.5 million USD.
Government. Government may borrow funds to take care of the budget deficit or as a measure of controlling the liquidity, etc. Government may require funds for long terms (which are raised by issue of Government loans) or for short- terms (for maintaining liquidity) in the money market. Government makes initial investments in public sector enterprises by subscribing to the shares, however, these investments (shares) may be sold to public through the process of disinvestments. Market Intermediaries. There are a number of market intermediaries known as financial intermediaries or merchant bankers, operating in financial system. These are also known as investment managers or investment bankers. The objective of these intermediaries is to smoothen the process of investment and to establish a link between the investors and the users of funds. Corporations and Governments do not market their securities directly to the investors. Instead, they hire the services of the market intermediaries to represent them to the investors. Investors, particularly small investors, find it difficult to make direct investment. A small investor desiring to invest may not find a willing and desirable borrower. He may not be able to diversify across borrowers to reduce risk. He may not be equipped to assess and monitor the credit risk of borrowers. Market intermediaries help investors to select investments by providing investment consultancy, market analysis and credit rating of investment instruments. In order to operate in secondary market, the investors have to transact through share brokers. Mutual funds and investment companies pool the funds (savings) of investors and invest the corpus in different investment alternatives. Some of the market intermediaries are: Lead Managers Bankers to the Issue Registrar and Share Transfer Agents Depositories Clearing Corporations Share brokers
Credit Rating Agencies Underwriters Custodians Portfolio Managers Mutual Funds Investment Companies These market intermediaries provide different types of financial services to the investors. They provide expertise to the securities issuers. They are constantly operating in the financial market. Small investors in particular and other investors too, rely on them. It is in their (market intermediaries) own interest to behave rationally, maintain integrity and to protect and maintain reputation, otherwise the investors would not be trusting them next time. In principle, these intermediaries bring efficiency to corporate fund raising by developing expertise in pricing new issues and marketing them to the investors.
Questions for chapter 2 1. Retail traders in the financial market. 2. Brokers in the financial market. 3. The Central Banks in the financial market. 4. Banks in the financial market. 5. Government in the financial market. 6. Market Intermediaries in the financial market.
References 1. Major Participants and Players in Financial Markets // MBA Knowledge Base – https://www.mbaknol.com/financial-management/major- participants-and-players-in-financial-markets/ 2. Participants of Financial Markets // FX Trading Revolution Team – https://www.fxstreet.com/education/participants-of-financial-markets- 201611291220