Bites Of Trading Knowledge #17

What is a custodian? -

A custodian is a financial institution that holds customers' assets or securities for safekeeping to prevent them from being stolen or lost. The custodian may hold equities, bonds, derivatives, or other assets in electronic or physical form on behalf of its customers. Custodians could offer related financial services such as account management and reporting, transaction settlement, and compliance related to anti-money laundering and tax regulations.

What is an exchange? -

An exchange is a venue where buyers and sellers trade equities, bonds, derivatives, and other tradable assets. Exchanges are often regulated by financial regulators and provide liquidity, which give market participants the ability to buy and sell assets at a fair market value.

What is a financial regulator? -

Governments have various agencies in place given the responsibility to regulate and oversee financial markets and companies participating in the financial system. These agencies each have a specific range of duties and responsibilities that enable them to act independently of each other while they work to accomplish similar objectives. For example, in the United States, the Securities and Exchange Commission (SEC) has oversight of the securities industry (stocks and shares), whereas the Commodity Futures Trading Commission (CFTC) regulates and oversees derivative markets (futures, swaps, and options).

Common application of financial market instruments for managing risk and opportunities.

Position and Risk Management

Risk management is the responsibility of market participants designed to limit risk exposures that specifically applies to the participants financial profile in the market.

The financial profile of a participant may include their role in the financial market or the amount of capital under their responsibility to be managed in the market, and therefore the risk variables that each would need to identify may be unique.

For both corporate and individual investors, the market to trade would be a key variable to clearly state and support with reasons for trading or investing. Reasons for selecting one market over another could include price volatility, liquidity, daily volume traded, size of the minimum price increment, and value of the minimum price increment. Comparing these variables between markets will help decide the suitability and/or risk of each.

For example, if Mini-Brent Crude Oil futures (BM) moves around $2.00 per day (or 2 points) and a point is worth $100, a trader might experience a $200 fluctuation in their account balance for one day. Another example is the U.S Dollar / Singapore Dollar (USDSGD), which could move 70 pips or more per day and trading a standard lot size with each pip worth $10, a $700 fluctuation could be expected for one day.

Market participants may also manage their risk through the size of their positions. The larger their position size, the greater is their exposure and the smaller their position size their exposure is lower. Investors should determine the risk that would result from various position sizes and select the size that ensures that their risk limit is not exceeded. Finally, setting stops with a specified loss amount provides protection if the market does not move in the desired direction. It helps to prevent creating a loss scenario which is larger than an account can handle.

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TRADDICTIV · Research Team

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