Theoretically anyone who buys/sells in a market is a trader. Different types of traders exert different influence on price behavior.
1. Informed Trader: anyone who has information about the right side of the market
2. Uninformed Trader: anyone who takes the opposite side of informed traders
- 1 Speculators:
- 2 Liquidity Suppliers
Unlike value traders news traders do no estimate value of an instrument from first principle and all available data. Their object is merely to estimate how value will change in response to their news information. They estimate total instrument values by adding to current prices their estimates of how their news changes prices.
- Time constrained since position should be taken before information becomes publicly available
- Faster price adjusts to trades, Discouragement to further informed trading and decreases realized spread
Sentiment-oriented Technical Traders
When technical traders trade in response to predictable price patterns (“judge market sentiment”) caused by uninformed traders, they effectively act as dealers or order anticipators. If they offer liquidity to the uninformed traders they are essentially dealers. Their trading tends to make the prices more informative.
Information-oriented Technical Traders
Information oriented technical traders profit by identifying predictable price patterns that results when other traders make mistakes. Technical trading strategies that exploit informed traders’ mistakes are rarely consistently profitable. Strategies that work well in the past fail when informed traders learn from their mistakes. (Harris, page 231). They buy extreme winners or sell extreme losers.
They act late… loose because tend to buy when prices are already high and sell when prices are already low.
Market Manipulators and Bluffers
They profit by disseminating misinformation through media, rumors, prices or volumes.
Seek assistance from financial analysts, statisticians, actuaries, macro-economists, industry economists, market professionals, accountants, engineers, scientists, computer programmers, librarians, and research assistants.
Trade in large block sizes after anticipating long-term market conditions.
Simultaneously buy undervalued and sell overvalued instruments.
They devise order submission strategies for institutional (large) Traders.
Noise traders earn more than rational traders, if a) High variance b)Many noise traders c)High risk aversion
Noise traders have always a lower utility
Those who show their full order size (thickness) and intentions publicly. Their success may depend whether the book(market) is plastic or inelastic. For a plastic market:
- Predators cover their positions after a short duration which itself stabilizes liquidity
- At initial phase they may succeed the institution to sell at market
Source: The book Trading and Exchanges by Larry Harris