Who is on the other side of my trade?Needs one idea

Usually not somebody with the opposite opinion. Most often it is a firm with no view at all, being paid to be there.

3 min read · 495 words

Someone, always — a trade needs two sides. But the picture people carry, of a person who thinks the opposite and one of you being wrong, is the least common case.

The candidates

• A market maker. Quotes both sides continuously and hopes to end the day roughly flat, earning the spread rather than a direction. When you buy, it sells; when the next person sells, it buys back. It has no opinion about the price and does not want one.
• A hedger. Selling something because it owns the risk elsewhere. The airline selling fuel exposure is not predicting cheaper fuel; it is removing a variable from its own accounts.
• An index fund. Trading because the index changed, on a date published in advance, with no view whatsoever.
• A forced seller. A margin call, a fund meeting redemptions, a mandate that no longer permits the holding after a downgrade. None of these people are expressing a judgement about the price.
• Another investor with a different view. Real, and the smallest slice.

The other side of the trade takes this across every asset class; each category page also lists who is choosing and who is forced in that particular market.

Why this is worth knowing

Because "someone is selling, so someone thinks it is worth less" is a bad inference, and it is the one most people make. If the seller is an index fund rebalancing or a pension fund raising collateral, the sale carries no information about value at all. Prices move on flows that have nothing to say.

The reverse is also true: when a price moves and nobody was forced, that is more informative than a bigger move driven by a liquidation. Knowing which kind of counterparty was active is the difference between reading a price as a message and reading it as noise.

The market maker's side of it

A firm quoting both sides is not doing you a favour and is not your adversary. It is running a business with two problems: the spread has to cover its costs, and it loses money when it trades with somebody who knows something it does not. That second problem is why spreads widen in fast markets and around announcements — not because anyone decided to charge more, but because the chance of being on the wrong side of informed trading went up.

It is also why the spread is narrower in heavily traded instruments. More flow, more of it uninformed, less risk in standing there.

Where there is no other side at all

In a mutual fund you do not trade with anybody: you subscribe or redeem with the fund, at a price computed from what it holds. In a certificate the other side is the issuing bank itself, permanently, which is why the issuer's own creditworthiness is part of the product rather than a detail about it.

Those two cases are worth separating out precisely because they feel like trading and are not.