Who are the players in the futures market

Who are the players in the futures market

Generally speaking, the two primary players in the futures market are hedgers and speculators.

Hedger

The futures markets exist to facilitate the management of risk and are thus used extensively by hedgers - individuals or businesses who have exposure to the price of an agricultural commodity, currency, or interest rate, for instance, and take futures positions designed to mitigate those risks. In other words hedging is taking out insurance against the commodity moving against your position. It requires the hedger to take a futures position opposite to that of his or her position in the actual commodity or financial instrument. For example, a soybean farmer is at risk should the price of the commodity fall before he harvests and sells his crop. A short position in the futures market will return him a profit if the price of soybeans declines, and thereby the hedger (farmer in this case) will profit on the short futures position compensating him for the loss on his crop.

Speculator

Speculators are attracted to futures trading simply because they see the opportunity to profit from price swings in commodities and financial instruments. Speculators take advantage of the fact that the futures markets offer them access to price movements; the ability to offset their obligations prior to delivery; high leverage (low margin requirements); low transaction costs; and ease of assuming short as well as long positions. In pursuit of trading profits, speculators willingly assume the risk that hedgers wish to transfer. In this process, speculators provide the liquidity that assures low transaction costs and reliable price discovery, market characteristics which in turn make futures markets attractive to hedgers.
Besides these two broad classifications of players in the futures market, traders can also be categorized in a number of other ways. There are full-time professional traders and part-time traders; traders who trade on the trading floor or behind a computer screen. Each of these market participants plays an important role in making the markets efficient places to conduct business.

Public Traders

The vast majority of speculators are individuals trading off the floor with private funds. This diverse group is generally referred to as "retail" business. With the growing movement from trading on the floor to the computer screen, the retail customer is becoming a more important force in futures trading.

"Local" Traders

Perhaps the most visible and colorful speculator is the professional floor trader, or local, trading for his own account on the floor of an exchange. Locals are usually more interested in the market activity in the trading pit as opposed to the activity in the underlying market fundamentals. With the popularity of electronic trading sweeping the industry, a trader who operates in a fashion similar to a floor local has emerged-the "electronic local." The electronic local trades using the same method as the local except they do so through the Internet rather than in the trading pits of Chicago.

Proprietary Traders

Another major category of trader is the proprietary trader, who works off the floor for a professional trading firm. These "upstairs" traders are employees of large investment firms, commercial banks and trading houses typically located in major financial centers. This group has a number of different trading objectives. Some engage in speculative trading activity, profiting when the market moves in their direction. Such proprietary traders are compensated according to the profits they generate. Other proprietary traders manage risk, hedging or spreading between different markets-both cash and futures-in order to insulate their business from the risk of price fluctuation or exploiting differences and momentary inefficiencies in market-to-market pricing.

Market Makers

Market makers give liquidity to the market, constantly providing both a bid (expression to buy) and an offer (expression to sell). Increasingly important in electronic markets, market makers ensure that traders of all kinds can buy and sell whenever they want. Market makers often profit from the "spread," or the small difference between the bid and offer (or ask) prices.
You can see the futures market is made up of many different players working with different motivations for the common good of the market place. Each player has his or her own motivation and executes business in a strategy that best fits those individual objectives.