Lesson 1 of 2 · 2 min
Participants & inventory
Who is on the other side of your trade — dealers, funds, CTAs, hedgers and retail — and why inventory matters.
Every trade has a counterparty. Knowing who tends to be active, and why, makes the auction far easier to read.
The main groups
Market makers and dealers
Provide liquidity on both sides and earn the spread. They don't want large directional exposure, so they hedge and manage inventory constantly.
Asset managers and pension funds
Move large amounts slowly, often over days, using execution algorithms benchmarked to VWAP or similar. They are classic other-timeframe participants.
Hedge funds and CTAs
Range from discretionary macro funds to trend-following systematic programmes (CTAs). Systematic flows can add momentum once trends are established.
Hedgers
Use futures to reduce risk on stock portfolios. Their trades can be large and price-insensitive.
Short-term and retail traders
Intraday speculators, including high-frequency firms and individuals. Most of the second-to-second activity — and most rotation inside value.
Inventory
Inventory is the net position a participant group is carrying. When short-term traders are all leaning the same way, the market can move sharply as they're forced to unwind — a short squeeze or long liquidation.
Key Insight
Signs that short-term inventory is one-sided: a strong overnight move into the open, poor highs or lows, and a market that moves sharply on little news as positions are closed.
Trading implication
Ask two questions on every move: who is likely driving this, and are they new participants (initiative) or existing ones closing out (inventory correction)? The answers suggest how far a move can travel.
Continuing marks this lesson complete. Your progress stays in this browser.