A professional who buys and sells financial assets on any financial market.

Author: Austin Anderson
Austin Anderson
Austin Anderson
Consulting | Data Analysis

Austin has been working with Ernst & Young for over four years, starting as a senior consultant before being promoted to a manager. At EY, he focuses on strategy, process and operations improvement, and business transformation consulting services focused on health provider, payer, and public health organizations. Austin specializes in the health industry but supports clients across multiple industries.

Austin has a Bachelor of Science in Engineering and a Masters of Business Administration in Strategy, Management and Organization, both from the University of Michigan.

Reviewed By: Sid Arora
Sid Arora
Sid Arora
Investment Banking | Hedge Fund | Private Equity

Currently an investment analyst focused on the TMT sector at 1818 Partners (a New York Based Hedge Fund), Sid previously worked in private equity at BV Investment Partners and BBH Capital Partners and prior to that in investment banking at UBS.

Sid holds a BS from The Tepper School of Business at Carnegie Mellon.

Last Updated:December 19, 2023

Who is a Trader?

A professional who buys and sells financial assets on any financial market, whether for themselves or on behalf of another person or entity, is known as a trader. 

The length of time an individual owns an asset is the primary distinction between a market speculator and an investor. They often retain assets for shorter periods to profit from short-term trends, but investors typically have a more extended period.

When a broker deals for a finance company, they can trade with the funds and credit of the employer and are compensated with a mix of pay and commissions. A speculator can also work for themselves, in which case they will be using their funds and credit while keeping all of the profits.

Short-term trading has drawbacks, including brokerage fees and giving up the bid spread. In their pursuit of profit, stock market merchants typically employ short-term trading tactics, resulting in high brokerage costs.

This expense is less of a concern now, thanks to the proliferation of fiercely competitive discount brokerages and the tightening of spreads on computerized trading platforms in the foreign currency exchange.

There are trading rooms at many sizable financial institutions where brokers who purchase and sell a broad array of goods on the corporation's behalf—operate.

Every speculator has a maximum position size, maturity, and mark-to-market loss before the position must be closed. The stock retailer earns a salary and bonuses; the corporation bears the primary risk and keeps most of the profit.

The majority of those who trade on their accounts, on the other hand, use a discount broker and computerized trading platforms and operate from home or a tiny office. Their credit and financial resources determine their maximum borrowing capacity, but they keep all earnings.

Types of Traders

There are seven types of traders: Stock, Floor, Rogue, Scalping, Pattern Day, High-Frequency, and Local.

Stock Traders

A person or business engaged in trading equity securities and seeking to make money from acquiring and selling such securities is referred to as a stock retailer, equity speculator, or share speculator. 

Investors, agents, hedgies, arbitrageurs, speculators, stockbrokers, and others can trade stocks. In addition, large publicly listed corporations may use a stock exchange for such equity trading. 

On over-the-counter marketplaces and occasionally equity crowdfunding platforms, stock shares in smaller publicly traded businesses can be bought and sold. 

Proprietary trading is when stock speculators trade on their behalf. Another option is to use an agent who is permitted to purchase and sell stocks on the owner's behalf. 

Typically, a stockbroker is used when trading through an agency. Brokers receive a commission for handling the transaction.

Market makers are professionals who purchase and sell shares of a particular firm on their behalf and on behalf of other customers. They assist in controlling price variance or volatility.

A professional market merchant may have a steep learning curve, and his ultra-competitive performance-based career may be cut short, especially during generalized stock market crashes. 

In contrast to a stockbroker, a professional arranges transactions between a buyer and a seller and receives a guaranteed commission for every deal executed.

Operations involving the stock market include a significant amount of danger, unpredictability, and complexity, particularly for imprudent and inexperienced stock retailers and investors looking for a simple method to earn money quickly. 

Trading activities are also not free. Stock speculators and investors must pay commissions, taxes, and other fees for brokerage services, such as buying and selling orders issued at the stock market.

Depending on each national or state law involved, a wide range of financial requirements must be complied with. 

Jurisdictions levy taxes on transactions, dividends, and capital gains within their purview. These financial responsibilities, nevertheless, will differ between regions.

In other cases, taxation may already be included in the stock price due to the many laws that corporations must follow in their jurisdictions, or it may be beneficial to the economy to conduct tax-free stock market activities.

Other costs that must be considered include the opportunity costs of money and time, currency risk, financial risk, Internet, data, and news agency services, as well as energy consumption costs.

Stress and sadness are two mental health conditions brought on by stock market volatility. 

This is consistent with studies on how the stock market might affect a person's mental health.

Professionally trained and experienced stock speculators and investors typically develop a psychological resilience to deal with these negative factors over time. 

Otherwise, they run the risk of continuously experiencing mental health issues throughout their careers or financial activities that rely on the financial markets.

Floor Trader

A stock or commodities exchange member who trades on the exchange's floor for their account is known as a floor trader. 

Like exchange experts who trade on behalf of others, floor traders are subject to the same trading regulations. 

It is essential to distinguish this phrase from floor broker. The terms registered competitive speculators, locals, or individual liquidity providers occasionally describe floor speculators.

Before they are allowed to trade on the exchange, these speculators must pass a screening procedure. 

The floor merchants use an open outcry system that is gradually being replaced by automated trading platforms and computers that function similarly to humans but don't include stock speculator interaction.

The Instinet was the first significant electronic alternative; it allowed users to communicate directly with one another without using the trading floor. 

Although it did not take off until the 1980s, it has played a significant role alongside companies like Bloomberg and Archipelago. 

The usage of technological tools for duties carried out by floor speculators has grown over time. However, significant American exchanges, like the NYSE, still favor the open outcry technique, which entails verbal contact. 

Trading with this approach has the advantages of being able to read people, as well as unexpectedly reduced mistake rates when compared to computers, which cannot pick up verbal cues.

Rogue Trader

An employee who under certain restrictions, has the authority to execute transactions on behalf of their company but instead executes illicit trades. Securities may also be mislabeled as part of it. 

Stop-loss orders and pattern trading are two common tactics employed by traders. For example, a speculator might instruct a broker to purchase or sell a stock when it reaches a specific price by using a stop-loss order. 

The offender works for a firm as a genuine employee, but without authorization, they engage in business on the company's behalf or misrepresent securities that belong to the company.

Nick Leeson is a well-known example of a rogue market merchant. In 1995, his company Barings Bank was forced into bankruptcy due to losses on unapproved bets in index futures contracts.

Leeson suffered a US$1.3 billion loss that led to the collapse of the centuries-old financial organization. 

This was due to his bad judgment, escalating early profits, management's lack of control, a naive regulatory environment, and an unanticipated outside catastrophe, the Kobe earthquake.

Some have questioned whether or not some speculators are not, in fact, rogue, as in the instances where employers directed the activity or knew about the transgressions but chose to ignore them because of the profits involved. 

In some cases, speculators have made initial large profits for their employers from trades in violation of applicable laws and company rules and - their goal - large bonuses for themselves. However, this is not referred to as rogue trading and is not punishable. 

There have been enormous financial losses and bankruptcies due to what are considered horrendously bad decisions made by senior decision-makers in financial firms, such as the insolvency of Lehman Brothers that required the 2008 United Kingdom bank bailout plan.

Scalping Trader

The smallest time period in trading is known as "scalping," and it takes advantage of little fluctuations in exchange rates. Scalpers imitate established market makers or experts to manipulate markets.

Making a spread entails purchasing at the bid price and selling at the asking price to profit from the difference between the bid and ask prices. 

As long as market speculators are prepared to accept market pricing, this approach permits profit even when the bid and ask don't change. 

Establishing and liquidating a position swiftly—often in minutes or even seconds—is typically required.

Market makers or professionals who maintain the liquidity and order flow of a market's product play the function of scalpers.

Scalping is often done when there is a lot of capital, significant leverage, or when there are currency pairings with a tiny bid-offer spread since the profit for each transaction is dependent only on a few basis points.

The effectiveness of scalping depends on the market's liquidity. Due to differences in popularity, each product within the market obtains a varied spread. 

The spreads are tighter the more liquid the markets and the goods are. 

Since they may quickly enter and exit massive holdings without negatively affecting the market, some scalpers prefer to trade in more liquid markets.

Scalpers want steady or quiet items, in contrast to momentum market speculators. Imagine scalpers making money all day if the asset price would not change. 

They would need to place their orders on the same bid and ask, resulting in hundreds or thousands of trades. 

They do not have to be concerned about unexpected price fluctuations.

Investors that use a concise time frame, or "scalpers," try to make money off market waves that are occasionally too tiny to be visible on a one-minute chart. 

This increases the number of movements a scalper may employ to generate daily revenue.

The scalper seeks hundreds of little profits throughout the day rather than one significant profit like a trend trader could. 

The scalper may have hundreds of little losses throughout this procedure over the same time frame. 

Because of this, a scalper needs to practice prudent risk management, never allowing losses to mount up.

Pattern Day Trader

The Financial Industry Regulatory Authority, or FINRA, designates a stock trader who completes four or more day trades in five business days.

This is done within a margin account as a pattern day market speculator if the number of day trades exceeds 6% of the customer's overall trading activity for the same five-day period.

Any client that buys and sells specific security in the same trading day or day trades and does so four or more times in any five consecutive business days is subject to a FINRA regulation; the rule only applies to margin accounts; cash accounts are not subject to the rule.

Special regulations apply to pattern day dealers. The fundamental guideline is to keep at least $25,000 in equity in a margin account to engage in pattern day trading.

Before engaging in any day trading, the needed minimum equity must be present in the account. 

If a person is thus categorized, their limitations must go unbroken for three months before they are released.

Brokerage companies are obliged by NYSE 432 to keep a daily record of the needed margin.

The Securities and Exchange Commission, or SEC, authorized changes to NASD Rule 2520 on February 27, 2001, which included approval of the minimum equity requirement in FINRA Rule 4210.

High-Frequency Trader/HFT

HFT is a sort of algorithmic financial trading that uses fast-frequency financial data and electronic trading instruments. It is characterized by high speeds, high turnover rates, and high order-to-trade ratios.

Although there is no definition of HFT, its significant characteristics include co-location, compelling algorithms, and very short investment horizons. As a result, HFT may be the most common type of algorithmic trading in the financial sector

In particular, it refers to the quick trading of securities using advanced technology instruments and computer algorithms. 

HFT employs computerized proprietary trading algorithms to enter and exit positions in seconds or milliseconds.

Since the 1930s, high-frequency trading has typically taken the form of experts and pit market speculators purchasing and selling positions at the exchange's physical site, with high-speed telegraph service to other exchanges.

Since NASDAQ debuted a completely computerized trading method in 1983, the rapid-fire computer-based HFT has been progressively evolving. 

HFT trades had an execution time of several seconds at the beginning of the twenty-first century, but by 2010 this had dropped to milli- and even microseconds. 

High-frequency trading was previously mainly unknown to the general public outside the financial industry; one of the first articles to do so was published by the New York Times in July 2009.

Local Trader/Merchant

A merchant is a person who deals in goods created by other people, particularly one who does business internationally.

In the past, a merchant was somebody engaged in commerce or business. There have been merchants as long as there has been industry, trade, and marketing. 

Messengers, a name for neighborhood merchants such as butchers and grocers, and Koopman, a term for global merchants who functioned on a large scale. 

Merchants imported and exported commodities over great distances and provided added-value services like credit and banking in 16th-century Europe due to merchants.

Since people have been involved in trade and business, merchants have existed. Ancient Babylonia and Assyria, China, Egypt, Greece, India, Persia, Phoenicia, and Rome had active commercial networks. 

A wealthy and influential merchant elite rose to prominence throughout the European Middle Ages due to the swift expansion of trade and commerce.

Europeans now had access to a considerably wider variety of products because of new commerce routes made possible by the age of discovery. 

To reach geographically distant markets, products started traveling significantly greater distances in the 1600s.

 After Asia was opened to European commerce and the New World was discovered, merchants imported items over extremely great distances. 

This includes calico cloth from India, porcelain, silk, and tea from China, spices from India and South-East Asia, and tobacco, sugar, rum, and coffee from the New World. 

Modern commercial techniques were starting to show by the eighteenth century, and a new sort of manufacturer-merchant was beginning to develop.

Researched and Authored by Aviral Mathur I LinkedIn

Reviewed and Edited by Sakshi Uradi | LinkedIn

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