Who are Market Participants?

• Scalpers/Day Traders are those participants who take positions in futures contracts for a single day and liquidate them before 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 a 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 the futures market due to their large volumes of transactions.

• Such players can also negatively affect price formation and market functioning due to excessive reliance on speculative trading.

• A particular category of scalpers is that of high-frequency traders who only hold contracts for micro-seconds thanks to 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 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 to profit from price movements.

• The speculators generally assume higher risk and expect a higher return on their investments.

• They do not have any real need to buy, sell, or deliver the actual commodities.

• They wish to liquidate their positions before the contract's expiry date and conduct a purely financial transaction.

• Due to the margin system, speculators operate in the futures market with minimum investments.

• An upfront initial margin of 5 per cent (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 accounts.

• The speculators are supposed to provide market liquidity as the number of those seeking protection against declining prices is rarely the same as those seeking protection against rising prices.

• Speculators are frequently labelled as investors and non-commercial players in the financial media.

• Arbitrageurs are traders who buy and sell to make money on price differentials.

• 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 to the futures market and help farmers benefit from price discovery and 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 allowed to collect commodities from farmers and sell them in the future market.

• Position Traders maintain overnight positions, which may run into weeks or even months, in anticipation of favourable movement in the commodity futures prices.

• They may hold positions where they run enormous risks and 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 for clients – for a commission.

• The Exchange is a central place (physical or virtual) where market participants trade standardized futures contracts.

• The regulator oversees the working of the Exchange. The Forward Markets Commission (FMC) is the regulatory authority for the commodity futures market in India. It is the equivalent of the Securities and Exchange Board of India (SEBI), which regulates the equities markets in India.