Cross-Border Trading

The role and importance of international financial markets and the traders who work in the industry has grown during the past decades. Professional traders are highly visible, especially in the media. They tend to be in a position to exploit market imperfections and have access to privileged information, critical mass, or proprietary knowledge and models.

Financial markets can be defined in two ways. The term can refer to organizations that facilitate the trade of financial products or it can refer to the interaction between buyers and sellers to trade financial products. Many who study the field of finance use both definitions, but economics scholars tend to use the second meaning. Financial markets can be both domestic and international.

Financial markets can be seen as an economics term because it highlights how individuals buy and sell financial securities, commodities, and other items at low transaction costs and prices that reflect efficient markets. The overall objective of the process is to gather all of the sellers and put them in one place so that they can meet and interact with potential buyers. The goal is to create a process that will make it easy for the two groups to conduct business.

When looking at the concept of “financial markets” from a finance perspective, one could view financial markets as a way to facilitate the process of raising capital, transferring risk, and conducting international trade. The overall objective is to provide an opportunity for those who want capital to interact with those who have capital. In most cases, a borrower will issue a receipt to the lender promising to pay back the capital. These receipts are called securities and can be bought or sold. Lenders expect to be compensated for lending the money. Their compensation tends to be in the form of interest or dividends.

Traders

Trader activities can be divided into three categories, which are trading on behalf of the customer, market making, and propriety trading. Traders with the least amount of risk are the ones who act on behalf of the customer. At the other end of the spectrum are proprietary traders, who take on the greatest risk. Regardless of the category, traders must utilize a set of strategies and approaches in order to make a profit. Four of the main strategies include the following:

• 1.
  Insider strategy: The trader achieves the advantage by exploiting privileged access to information. However, the trader must be cautious because some techniques may be illegal. For example, information about company earnings [Page 441]and potential takeovers could be considered illegally obtained information. Insider strategies give the trader an opportunity to anticipate market movements.
• 2.
  Technical strategy: Some traders attempt to exploit market imperfections by analyzing past price information. One form of technical strategy involves the use of patterns in price data in order to identify potential turning points in price trends. This is referred to as charting. Traders attempt to identify trends early, buy into those trends, and exit before the trend breaks. There are a number of traders who use the technical strategy to complement other techniques.
• 3.
  Fundamental strategy: Fundamental strategies focus on the fundamental relationship between the economic value of the underlying asset and the market price. Traders use this strategy to seek expertise and information in order to obtain an accurate valuation of securities. There is an assumption that market values will converge to theoretical values.
• 4.
  Flow strategy: This strategy predicts prices as a function of demand and supply for securities in the market.

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