[Predictor]

Most traders focus a great deal of effort on studying how the market moves and why the market moves. But, comparatively fewer spend time thinking about who moves the market and how they make money. One practical benefit of understanding the various participants is the advantage that comes from being able to state more precisely the type of business that you are conducting as a trader. Understanding the various market participants and their objectives, also, helps one to understand the order flow and price action.

Who moves the market?

The most common participant is the uninformed market participant. The uninformed market participants trades are random, having no edge. These participants do not have an advantage and will lose more money the more they trade. They can make a profit but only by holding the market as it appreciates over time.

The next market participant is somewhat familiar and is known as the LIQUIDITY PROVIDER. The liquidity provider attempts to profit from capturing the spread. The liquidity provider attempts to profit from the uninformed order flow by taking the other side. Liquidity providers attempt to make as many trades as possible and pocket the spread over and over. Many displaced floor traders played the role of liquidity providers. Liquidity providers need to trade when the instrument doesn’t move much and when they can execute many trades without risk of the market moving. They profit not from the market making significant movements but rather by the number of times they can capture the spread. Indeed, they are more likely to pull out when the market trends strongly because of the greater risk they take.

Finally, we consider what I feel my primary trading role is in the futures market which is driving price to the real value (or predicting the future value). I therefore call this participant a PRICE DRIVER. Price drivers drive the market toward the future value by using market orders. It may seem contrary but price drivers get paid for placing market orders because the payoff comes not from the spread but from the movement of the market to the future value. In general, participants that are time sensitive will use market orders whereas participants who are price sensitive use limit orders. I tend to enter on market and exit on limit. Price drivers do run stop orders. However, it is more an effect of the stop orders being placed at the wrong place then a cause. Price drivers can only get paid when the market moves in their favor. Of course, a more passive form of price driver is the statistical arbitrage trader. The statistical arbitrager is more concerned with price rather then time and may prefer limit orders. Even so, they still need the market to move to make a profit.

Understanding the participants that trade in the market, their intentions, and how they make their profits explains various patterns that the market exhibits and clues one into where to look for opportunities. For example, trends on low volume are the understandable result of liquidity providers pulling out as the market moves against them and price drivers dominating. Trend exhaustion is seen as the combination of buyers filling all of their orders and liquidity providers re-entering the market, eventually encouraging new price drivers to enter in the opposite direction and new cycles to develop.
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Curtis
http://themarketpredictor.com