The participants in the futures market are as follows:
1. Participants on General Basis
i) Individual: Individual participants are sole trader or companies which are 90% owned or controlled by a sole-trader.
Individual participants may only trade for themselves and may not do give-ups.
ii) Broker: There are two types of brokers on the floor of the exchanges, i.e., commission brokers charge a fee for executing contracts/trades on behalf of their customer, whereas local traders trade for their own account.
There are different types of trades that can be passed to a commission broker. An individual or firm acting as an intermediary by conveying customers’ trade instructions. Other types of brokers are as follows:
- Market Maker: A market maker is a trader who trades for his or her own account.
- Account Executive: An account executive for a brokerage firm is often called customer’s broker. The account executive could be located in any town or city, and the account executive deals with his or her customers, conveying their orders to the exchange.
- Floor Broker: Floor Broker is a person with exchange trading privileges, who, in any pit, ring, post, or other p]ac provided by an exchange for the meeting of persons similarly engaged, executes for another person any orders for the purchase or sale of any commodity future delivery.
- Floor Trader: Floor traders are exchange members who trade futures contracts in the futures pit. A floor trader who trades solely for his own account is called a local. Locals provide liquidity for the market, usually by operating as scalpers. A scalper is a very short-term trader.
2. Participants on Trading Strategy Basis
i) Speculators: While hedgers buy or sell futures contracts to protect themselves against the risk of price changes, speculators buy or sell futures contracts in an attempt to earn a profit.
Speculators do not have a prior position that they want to hedge against price fluctuation. Rather they are willing to assume the risk of price fluctuation in the hope of profiting from them.
Speculators play a very important role in the proper functioning of the futures market. They absorb the excess demand (or supply) generated by hedgers and assume the risk of price fluctuations that hedgers want to avoid.
Speculators impart liquidity to the market, and their actions, in general, dampen the variability in prices over time.
ii) Hedgers: Hedgers are parties who are exposed to risk because they have a prior position in the commodity or the financial instrument specified in the futures contract.
For example, a farmer may be expecting produce of tonnes of wheat from his farm two months hence, or an investor may currently own a broadly diversified portfolio of equity stocks worth ₹ P million now.
By taking an opposite position in the futures market, parties who are at risk with an asset can hedge their position.
For example, the farmer may sell wheat futures, and the investor may sell stock index futures. By doing so, they can shield themselves against the risk of unexpected price changes.
iii) Arbitrageurs: An arbitrageur uses futures contracts to exploit price differences between different markets.
The term is mainly applied to trading in financial instruments, such as bonds, stocks, derivatives, commodities, and currencies.
Opportunities to arbitrage take place throughout the world markets, and derivatives are sometimes used to exploit these.
Individuals and institutions may also look for arbitrage opportunities, as when the current buying price of an asset falls below the price specified in a futures contract to sell the asset.
iv) Spreaders: A spreader is a trader or investor who takes out whatever differential might exist between two different markets and capitalizes on that disparity.
Some people trade an Intermarket spread, which is one market’s calendar month against another calendar month, and others spread intramarket, which is one contract against a completely different market.
An example of an intramarket spreader is a trader who makes a market in pork bellies versus live cattle or S&P versus NASDAQ.
An example of an Intermarket spread is; trading the August live cattle versus October or trading the S&P December contract against the S&P March contract.