Market Participants

Market participants make the legal bodies that take part in the process of purchasing and selling liabilities or assets in the principal market.

The activities of market participants play a main role in determining the fair market value of these tools being traded in the respective market.

The market value seems more reliable with more market participants. Below, I will talk about market participants in detail, so let’s begin!

What Are Market Participants?

“Market participants” is just another name for economic agents and decision-makers in a model of some aspect of the economy.

For instance, common types of market participants or economic agents include buyers and sellers in partial equilibrium models of a market.

The term “market participant” is utilized in the US constitutional law as a description for US states which act as producers or suppliers of marketable services or products.

Now, let’s take a closer look at some of the most common types of market participants.

What Are The Different Market Participants?

Not only do short-term traders and long-term investors make the stock market. Other types of players, also known as market participants, take part in this market.

Each participant has a special role but many of the roles depend on each other to make the market work smooth, so they’re intertwined.

Stockbrokers

Also known as registered representatives in the United States, stockbrokers purchase and sell securities in the name of investors.

These licensed professionals act as a middleman between stock exchanges and investors by purchasing and selling securities for investors.

Investment bankers

Investment bankers represent private businesses that want to go public via initial public offerings as well as businesses that take part in pending mergers and acquisitions.

Primarily, they handle listing processes according to the regulatory requirements of the stock market.

Portfolio managers

Portfolio managers invest portfolios or collections of securities for customers. They receive suggestions from analysts and execute the buy or sell decisions for portfolios.

Hedge funds, mutual fund companies, and pension plans utilize these managers for executing a decision as well as placing investment strategies for the funds that they own.

Custodians

Custodians as well as depot service providers represent institutions that store customers’ securities for safekeeping to decrease the risk of their loss or theft.

They also work in sync with the exchange to move shares to and from the respective accounts of transferring parties based on trading on the market.

Stock exchanges

Stock exchanges work as institutions for profit, so they charge a fee for their services.

The main source of profit for stock exchanges is the revenue from the transactional fees they charge for each trade completed on their platform.

They also earn money from the listing fees firms pay during the IPO process as well as other follow-on offerings.

Exchanges earn revenue from selling important market data on their platforms like summary data, real-time data, reference data, and historical data as well.

Information like this is key for equity research and other uses. Some exchanges also sell tech items. Those tech items include a dedicated network connection to the stock exchange and trading terminal for a certain fee.

Arbitrageurs

The arbitrageurs determine mispricing in the market for quite low-risk profits. They’re traders who keep the stock market more efficient.

High-frequency and algorithmic trading programs take part in this type of arbitrage quite often.

Market makers

Market makers make the trading of shares easy by placing bid and ask prices.

They’re broker-dealers who also keep a list of shares and ensure enough liquidity in the stock market for certain shares. They make money from the difference between the bid and ask prices that they place.

Speculators

The speculators take part in directional bets in the stock market with wider indexes or individual stocks. They can take long positions by purchasing shares or short positions by short selling.

Some speculators keep their positions for quite some time based on technical or fundamental analysis, whereas others trade much quickly and frequently, as in the case of day traders.

Clearing agencies

The clearing agencies, also known as SROs (self-regulatory organizations) need to be registered with the SEC. And like all SROs, they’re responsible for creating and pushing their rules and disciplining members. Clearing agencies include clearing corporations and depositories.

The National Securities Clearing Corporation, as well as the Fixed Income Clearing Corporation, compare different member transfers, clear those trades and make instructions for automated settlement of those trades.

They’re cleaning corporations, while depositories such as The Depository Trust Company keep securities certificates for their members, change positions between members, and keep ownership records.

Credit rating agencies

These agencies deliver opinions on the reliability of security or company. Credit rating agencies represent the credit quality utilizing a grade.

Typically, credit ratings determine investment grades and non-investment grades. Let’s say that a credit rating agency assigns a “triple-A” credit rating as a best “investment grade”, and a “double-B” or below credit rating for “non-investment grade” or “high-yield” corporate bonds.

Such credit rating agencies registered with the Securities and Exchange Commission are also known as “Nationally Recognized Statistical Rating Organizations”. 

ECNs/ATSs

The Electronic Communications Networks represent electronic trading systems that match buy and sell orders at certain prices for customers of the system automatically. They register with the SEC as broker-dealers. And they’re subjects of Regulation ATS.

The Alternative Trading Systems, on the other hand, include all systems that execute securities exchange decisions. And they’re not registered with the SEC as exchanges.

Investment advisors

The job of investment advisers is pretty self-explanatory.

They’re companies or people who provide real investment advice to investors or release analyses and reports associated with securities.

And of course, they complete these activities for compensation. 

Transfer agents

These agents keep track of changes of security ownership, keep the issuer’s security holder files, cancel and release certificates, and move dividends. They’re in the middle of security holders and issuing firms, so they must be registered with the SEC.

If the transfer agent represents a bank, it should be registered with a bank regulatory agency. No SRO controls transfer agents.

The Securities and Exchange Commission released rules and regulations for every registered transfer agent, with the intent of providing quick and accurate settlement and clearance of securities transfers and ensuring the safety of funds and securities.

Hedgers

Many companies make a foreign currency based on liability or asset in the standard line of operations.

Exporters and importers in international trade can have open positions in many different currencies and if the value of the foreign currencies fluctuates, they can experience changes. Hedgers take the opposing position in the market to keep themselves safe against this type of loss.

That way, if there’s a negative move in their standard position, it’s balanced out by the opposite position in their hedged positions, and their profits and losses are annulled and their business operations remain stable.

Central banks

Central banks play a key role in the foreign exchange market because they want to protect the exchange rate of the nation’s currency.

So every time the currency movement strays from a preferable range, the central banks step in and introduce measures such as open market operation.

That way, they accomplish the preferred position. Likewise, if the nation’s currency is attacked because of speculation, the banks introduce measures to guard the currency’s position.

Summary

As I already established, the stock market consists of many participants, also known as economic agents and decision-makers.

They include custodians, brokers, investment advisors, portfolio managers, and so on and so forth.

Hopefully, today’s article can help you learn more about market participants. If you find this information valuable and useful, share it with your social media friends.

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Ziga Breznik

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About the author

Ziga Breznik is the owner and head of research at PublicFinanceInternational.org – he is an active investor in the forex, crypto and stock markets – he has seen trading platforms disappear along with his investments – especially during the “crypto boom”. Ziga learned the hard way that finding a reputable and trustworthy online brokerage is key to long-term success in the financial markets. He founded PublicFinanceInternational.org as a platform where he shares his research with one goal in mind: to provide unbiased and trustworthy online brokers reviews.