Too few of us traders these days ever stop to think about what the financial markets really are and how they operate – to the potential detriment of our trading performance. Oh, sure. We know about the various market participants, the structure of the markets, and the things that tend to drive price action. Those who have operated on an institutional level will also understand the inter-relationships between different markets, the types of positions which the various participants hold, and how that plays out in price movement.
All that stuff, though, is one level above what really matters. The bottom line is that the financial markets operate to facilitate transactions.
Think about that for a second.
Exchanges are paid fees on each transaction. The more transactional flow the traders on the exchange generate, the more fee income the exchange makes.
Market makers look to profit through the process of buying on the bid and selling on the offer. The more frequently they do that, the more money they make.
So basically there is an institutional bias toward doing everything possible to generate as much trading volume as possible. Now the...
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