Who are Market Participants?
Scalpers/Day Traders are those participants who take positions in futures contracts for a single day and liquidate them prior to the close of the same trading day.
The scalpers have the shortest time horizon. They hold their positions for a few minutes while day traders close their positions before the end of trading each day.
Both the scalpers and the day traders try to make profit out of the intra-day movement in commodity futures prices.
They do not carry over their position to the next trading day. These market players provide liquidity in futures market due to large volumes of transactions undertaken by them.
Such players can also negatively affect the price formation and market functioning due to excessive reliance on speculative trading.
A special category of scalpers is that of high frequency traders who only hold contracts for micro-seconds thanks to the use of superfast computers and algorithms.
Hedgers are essentially players with an exposure to the underlying commodity and associated price risk – producers or consumers who wish to transfer the price risk on to the market.
The futures markets exist primarily for hedgers. The hedgers simultaneously operate in the spot market and the futures market.
They try to reduce or eliminate their risk by taking an opposite position in the futures market on what they are trying to hedge in the spot market so that both positions cancel one another.
They operate in the spot market to buy or sell the physical commodity, and in the futures market to offset any loss arising out of price fluctuations in the spot market.
Speculators are traders with no genuine commercial business to the underlying; they do not hedge but trade with the objective of making profits from movements in prices.
The speculators generally assume higher risk and also expect a higher return on their investments.
They do not have any real need to buy, sell or take delivery of the actual commodities.
They wish to liquidate their positions before the expiry date of the contract and carry out a purely financial transaction.
Due to the margin system, speculators operate in the futures market with minimum investments.
Upfront initial margin of 5 percent (or less) of the value of the contract provides speculators with substantial leverage.
The speculators may be professional institutional investors dealing in big contracts or small individual traders who trade on their own accounts.
The speculators are supposed to provide market liquidity as the number of those seeking protection against declining prices is rarely the same as the number of those seeking protection against rising prices.
In the financial media, speculators are frequently labeled as investors and non-commercial players.
Arbitrageurs are traders who buy and sell to make money on price differentials across different markets.
They simultaneously buy or sell the same commodities in different markets.
Arbitrage keeps the prices in different markets in line with each other. Usually, such transactions are risk-free.
Aggregators bring liquidity in the futures market and help farmers to benefit from price discovery and price risk management.
Aggregators could be farmers’ co-operatives, agricultural institutions like NAFED (National Agricultural Cooperative Marketing Federation), 'farmers or producers’ unions and non-governmental organizations that are allowed to collect commodities from farmers and sell in the futures market.
Position Traders maintain overnight positions, which may run into weeks or even months, in the anticipation of favourable movement in the commodity futures prices.
They may hold positions in which they run huge risks and may also earn big profits.
Brokers typically act as intermediaries and facilitate hedgers and speculators.
A commodity broker is a firm or individual who acts as a go between to buy or sell commodity contracts on behalf of clients – for a commission.
The Exchange is a central place (physical or virtual) where market participants trade standardized futures contracts.
Regulator oversees the working of the exchange. The Forward Markets Commission (FMC) is the regulatory authority for the commodity futures market in In-dia. It is equivalent of the Securities and Exchange Board of India (SEBI), which regulates the equities markets in India.