Who are the main market players?

Chapter 1: Intro

Let’s look at some of the principle players in financial markets. What are their moves and how do they fit together? We could write much more on each one – but here’s a handy overview.

Chapter 2: The market makers

Let’s start with market makers. The clue is in the name. A market maker, usually a bank or a brokerage firm, provides both the buy and the sell price for a commodity (and many other financial securities that are regularly traded). They ‘make’ a market. However, some care is needed: market makers do not bring buyers and sellers together. 

A market maker provides a measure of liquidity - that ‘L’ word again - with a ready-prepared bid-and-ask spread. Market makers can buy and sell at any time and will buy your stock, even if they don’t have a buyer lined up. So their role is very much about freeing up the market. It’s a service for now.

Most market makers are not about trying to pull a quick profit at your expense. Most want a professional long term relationship with a client. Their service is offered to a host of market players, from foreign exchange traders to large banks.

Chapter 3: High frequency traders

As with many things in life, timing is everything. The market makers strategy is to constantly buy and sell – and make, they hope, modest amounts of profit along the way.

High frequency traders (or HFTs) lie and wait in the long grass, waiting for a stock to rise or fall. Then they pounce. Increasingly, algorithmic computer models are deployed to support them.  

Not so far away is a snaking line of other market intermediaries and traders, which include:

•   Stockbrokers

•   Advisory

•   Execution-only

•   Retail traders

The smart market pinstripes of the full-service advisor, for example, offer all manner of advice – from retirement to tax planning and investments. But their services aren’t the cheapest.  

Which is where execution-only brokers come in. They’re happy to carry out any trading moves on your behalf. As their name implies, they don’t advise, and their fees are generally lower.

An advisory stockbroker is more a halfway house between the two – typically offering a quarterly or bi-annual review of your portfolio. They will also support any of your dealing or trading moves.

What of the role of private retail traders in all this? It’s important to separate those keeping a close eye on daily share price movements – typically day traders – and those investing for substantial time periods, such as the long-term investor.

The longer-term investor may be saving for retirement, school fees or a holiday. However both types of private trader are often heavily invested – it’s just they have very different investment timelines. Both are still key market players.