Most people tend to equate traders with short term punters who are in the market purely to make money. Like investors, traders too are in the market to make money but remember there is a method and a larger purpose to trading. You will be surprised to know that markets cannot function without traders’ active participation, says Guy Gentile. Here are 5 key roles that traders play in the market.

Reduce risk in the market through high volumes

Imagine that you are trying to sell shares of a stock, and you find that there are no buyers. That must have happened to you with small and mid-cap stocks, but you may have hardly faced the problem with large-cap stocks. For that, you need to thank the traders in the market. Traders are in the market for short term to medium term profits. As a result, they are agnostic in their trading strategies. That means these traders can be sellers at higher levels, and the same traders can be buyers at lower levels. This two-way approach of traders makes the market liquid, increases the volumes, and ensures that your transactions get executed with minimal execution risk. These actions of traders substantially reduce the risk of participation in the markets.

Traders assist keep the trading spreads in control.

This benefit may not be evident unless you get down and trade in the market. According to the buyer’s request, you will incur a loss, says Guy Gentile. This problem can be overcome if the bid-ask spreads are more delicate and narrower. That is a job that traders do to perfection. If they find the spreads too wide, traders participate in intermediate spreads inducing buyers and sellers to settle at a reasonable level. In the process, the trader also makes a spread and reduces the overall risk in the market by tightening the bid-ask spreads on the stock.

Short sellers can prevent acute market crashes.

Most people fear stock market crashes because they result in positions closure and massive losses. Typically, speculators and short-sellers are blamed for market crashes, but ironically these short sellers can prevent the market from crashing sharply. Here is how! When traders are pessimistic about the market, they will sell the stock or the future short. While it puts pressure on the market, it is not a free fall as the delivery positions are not liquidated. Secondly, when short sellers sell the stock at higher levels, they also buy back the stock at lower levels. This short covering helps stabilise the market, limiting your losses in the process. However, in the absence of short sell traders, markets can go into a free fall with more significant implications for investor wealth.

Contrary to what most people believe, traders like Guy Gentile have a significant role in markets. Markets would not be as robust and efficient today had it not been for the traders. They provide liquidity and ensure that the short-term cues on the macroeconomic and micro front are factored into prices. After all, that is what a healthy market is all about!