Page 143 - DCOM510_FINANCIAL_DERIVATIVES

Financial Derivatives

Notes 9.1.1 Entities in the Trading System

There are four parties/entities in the trading system. They are trading members, clearing
members, professional clearing members and participants.
1. Trading members: Trading members are members of NSE. They can trade either on their
own account or on behalf of their clients including participants. The exchange assigns a
trading member ID to each trading member. Each trading member can have more than
one user. The number of users allowed for each trading member is notified by the exchange
from time to time. Each user of a trading member must be registered with the exchange
and is assigned a unique user ID. The unique trading member ID functions as a reference
for all orders/traders of different users. This ID is common for all users of a particular
trading member.

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Caution It is responsibility of the trading member to maintain adequate control over
persons having access to the firm’s User IDs.
2. Clearing members: Clearing members are members of NSCCL. They carry out risk
management activities and confirmation/inquiry of trades through the trading system.
3. Professional clearing members: A professional clearing members is a clearing member
who is not a trading member. Typically, banks and custodians become professional clearing
members and clear and settle for their trading members.
4. Participants: A participants is a client of trading members like it financial institutions.
These clients may trade through multiple trading members but settle through a single
clearing member.

9.1.2 Types of Traders

Traders play a vital role in the futures markets by providing liquidity. While futures are designed
primarily to assist hedgers in managing their exposure to price risk, the market would not be
possible without the participation of traders, or speculators, who provide a fluid market of
buyers and sellers. Speculators provide the bulk of market liquidity, which allows the hedger to
enter and exit the market in a more efficient manner.

In other words, the two main categories of traders are hedgers and speculators. Hedgers are
those who use the futures market to manage price risk. Speculators, on the other hand, are those
who use the futures market for the profit motive. As such, the speculator assumes a market risk
for the potential opportunity to earn a profit. Futures traders can also be categorised in a
number of other ways. There are full-time professional traders and part-time traders; traders
who trade on the trading floor or behind a computer screen. Each of these market participants
plays an important role in making the markets efficient places to conduct business.

Public Traders

The vast majority of speculators are individuals trading off the floor with private funds. This
diverse group is generally referred to as “retail” business. With the growing movement from
trading on the floor to the computer screen, the retail customer is becoming a more important
force in futures trading. Further, with computer-based trading, “levelling the playing field”
between the different types of traders has become a reality.

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