Stock market traders
Traders usually see the stock market as something that provides speculative opportunities. Many of them think that technical commerce is profitable and that there is a market psychology that causes bubbles and crashes. Sometimes the market is described as having its own mood and personality, and it is often described as nervous, wavy or anxious. So, the market can be seen as psychologically organic and imperfectly efficient.
From this point of view, classical economic theories are unrealistic and not borne out by the perception of market traders. Therefore, there are other paradigms, like for instance, artificial intelligence, that can support the understanding of the stock market process. These paradigms are focused on the concept of learning; that is, the possibility of modifying the modus operandi as the market changes. A system of this type has to be able to relate the information that defines the market at earlier times to all the events that could have some influence in the future. These relations are very complex and could change very quickly. However, they are often related to previous events in the market.
Learning systems have a disadvantage; they start from scratch, i.e. from imprecise knowledge, and they have to learn from experience. So, the system has to deal with and learn from the other traders. A market simulator has been designed to perform this task. This simulator can investigate dynamic prices; investment strategies, market statistics, all performed by carefully controlled experiments. This simulator has also been used to study the accuracy of some automatic market traders. These market traders have been implemented as software agents applying some well-known artificial intelligent techniques. These techniques are mainly related to genetic algorithms and rule-based systems.
When an exchange converts to for-profit status, the members receive shares of stock in the new corporation. In the recent conversion of the Chicago Mercantile Exchange, member holding seats in the not-for-profit association received two classes of stock in the for-profit corporation. One class of stock represents ownership in the corporation, while the other carries the right to trade on the exchange. Both classes of stock will be traded.
According to federal law and rules of the exchange, trading may take place only during official trading hours in a designated trading area called a pit. This is a physical location on the floor of the exchange. Each commodity trades in a designated pit. In contrast to the specialist system used on stock exchanges, futures contracts trade by a system of open outcry. In this system, a trader must make any offer to buy or sell to all other traders present in the pit. Traders also use an unofficial, but highly developed, system of hand signals to express their wishes to buy or sell. Officially, however, all offers to buy or sell must be made through open outcry.
Traders in the pit fall into two groups that we can distinguish by their function. First, a trader can trade for his or her own account and bear the losses or enjoy the profits stemming from this trading. Often, these traders are members of the exchange. Second, a trader could be a broker acting on behalf of his or her own firm or on behalf of a client outside the exchange. For example, the brokers trading on the exchange often represent large brokerage houses. Having distinguished between traders who execute trades for their own accounts and those who execute trades for others, we must realize that certain individuals exercise both functions simultaneously.
Members of the exchange who trade in the pits are typically speculators. A speculator is a trader who enters the futures market in pursuit of profit, accepting risk in the endeavor. Some of the traders in the pit that trade for their own account may not be full exchange members themselves. It is possible to lease a seat on the exchange from a full member. Also, some exchanges have created special licenses allowing nonmembers to trade in certain contracts in which the exchanges are anxious to build volume. For the most part, a trader in the pit trading for his or her own account is a speculator.
In addition to speculators, many traders are hedgers, traders who trade futures to reduce some preexisting risk exposure. Hedgers are often producers or major users of a given commodity. For example, hedgers in wheat might include wheat farmers and large baking firms. Notice that these hedgers do not necessarily need to own the wheat when they hedge. A farmer might hedge by selling his anticipated harvest through the futures market. This could occur even before the farmer plants. Similarly, the baker who will eventually bake the farmers wheat harvest into bread may hedge an expected need for wheat months before the wheat is actually required. Therefore, hedging is the purchase or sale of futures as a temporary substitute for a transaction in the case market. For the most part, hedgers are not themselves located on the floor of the exchange. Instead, they trade through a brokerage firm. The brokerage firm communicates the order to the pit and has it executed by a broker in the pit.
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