A wide variety of market participants trade the Emini contract and each of these players has his own strengths and weaknesses. Knowing who is on the other side of your trades can help you become a more profitable trader. Let’s take a brief look at all the different types of traders involved with the Emini Market.
Institutions
Who Are They:
Large institutions involved in the emini markets are Goldman Sachs, JP Morgan, Salomon Brothers to name a few. They are corporate heavy hitters with extremely deep pockets who have the ability to move markets if they see fit.
Why They Trade Eminis:
Institutions trade the eminis for a variety of reasons. Great liquidity allows large orders to be broken down very quickly and positions can be liquidated with little attention drawn. Hedging also takes place as well as arbitrage trading between the larger S&P 500 Futures contract and the Emini S&P 500 futures contract.
Strengths:
Institutions have every advantage you can imagine over other players in the emini markets: access to enormous amounts of capital, highly trained and experienced traders, professional technical analysis, and inside information to name a few. Institutions are the 800 lb. gorilla in the emini markets. They have all the power and everyone else is trying to find out their next move so they can ride their coattails to profits.
Weaknesses:
There are a few arguments for weaknesses in the bureaucratic structures of insititutions and the heavy orders they must fill inside these markets can make them less flexible but when push comes to shove institutions have very few predators in the emini markets.
Managed Funds
Who Are They
Managed Funds are operated by a sole trader or a group of traders depending on the size of the fund. They can have different strategies and different goals for the funds. Long term, short term, aggresive, or conservative, there is a fund that fits any investors personal style. These funds typically have one or two proven strategies and are finely tuned money making producers.
Why They Trade Eminis:
The Eminis are an extremely technical basket of instruments. Technical markets usually mean that they are easier to forecast and trade in a purer sense of the word. Eminis are often thought to be a technical trader’s paradise because, for the most part, they are immune to large gaps and single company news events. The less volatile the market is for fundamental reasons, the better it is for funds who have highly specialized approaches to trading.
Strengths:
The main strengths behind managed funds is the employees and the systems in place. These are well oiled operations with highly trained staff who operate with extremely specialized technical trading patterns. These funds know which trades and which markets are their bread and butter and will typically play their cards very close to their chests.
Weaknesses:
The main weakness for managed funds is that they have to answer to the outside investors. They are not free to do as they please and adapt to changing market conditions as quickly as an independent trader. The larger the fund the more rigid the trading environment. Smaller funds have the flex ibility but they lack the heavy hitting power that comes with relatively deep pockets as compared to other market participants.
High Frequency Firms
Who Are They:
High frequency trading firms specialize in making money on very short term trades inside the emini markets. They have a number of different ways to go about pulling profits but a few of the more basic trades deal with bid/ask scalping and arbitrage trading. These firms have very advanced electronic systems that allow them to be in and out of trades before others are even aware of their presence.
Why They Trade Eminis:
High frequency firms trade the eminis because of their technical patterns and behavioral structures. High frequency trading also requires a high volume in order to maximize their short term inefficiency trades.
Strengths:
The major strength of the high frequency trading firms is their program technology and their reaction speed in developing markets. They are second to none when it comes to order execution and spotting very short term market inefficiencies.
Weaknesses:
High frequency trading firms rely on short term set ups that rarely last more than a second or two. If the market suddenly moves one way or another in a very large fashion, trading firms can suffer depending upon their leverage and risk tolerance on a certain position. High frequency firms are also limited in their risk to reward ratios as the moves they are trying to capture are so minuscule that it is difficult to keep a positive ratio in place.
Retail Traders
Who Are They:
Retail traders are all the traders in the world not employed by one of the three groups above. Retail traders are individual traders who either trade from an office or out of their home and who attempt to pull their salary from the markets on a daily basis.
Why They Trade Eminis:
Emini trading is a retail trader’s paradise when compared to other instruments. Stocks, bonds, options, forex, none of these markets compare with emini trading when all the factors are taken into account. Low commissions, exchange transparency, large volume, technical markets, low margins all add up to create a day trading nirvana for the retail traders.
Strengths:
The majority of retail traders don’t have any strengths, and they are typically what the three other groups profit from. The retail traders that do have strengths realize that they don’t have to trade everyday and can be flexible in their market choice and strategy deployment.
Weaknesses:
You name it, retail traders will try and find a way to suffer from it. Inexperience, lack of education, lack of reliable trading systems, slow exchange access, minimal trading capital, all these things are part of the weaknesses of 99% of retail traders. The success rate for retail traders is extremely small and without seeking out education or outside knowledge the average time in the emini markets is usually less than 6 months.
Conclusion
The only way to consistently make money in the Emini markets is to continually target inexperienced retail traders. Once you know how to spot amateur participation and how to interpret the moves of institutional traders inside these markets you will begin to see your trading results take an immediate turn. Learning to ebb and flow depending upon the actions of other market participants is what will ultimately separate the winners from the losers.
