What is a market?

What a market actually is

A financial market is, at its core, a mechanism by which buyers and sellers discover prices for instruments. Everything else — the exchange, the broker, the clearinghouse, the regulator — is supporting infrastructure.

There are two kinds of markets we'll care about:

• Exchange-traded markets. Centralized venues (NYSE, NASDAQ, CME) where buy and sell orders meet in a transparent order book. Prices are visible to all participants in real time.
• Over-the-counter (OTC) markets. Bilateral transactions negotiated directly between two parties (most bonds, most derivatives historically, all FX). No central order book; prices are quoted by dealers.

You'll trade exchange-traded equities and futures in this curriculum's exercises. OTC products show up later when we discuss credit, swaps, and bespoke derivatives.

Who's in a market

Every market has roughly four kinds of participants. Recognizing which one you are at any moment matters more than people think.

• Hedgers. Already exposed to a risk; using the market to offset it (a wheat farmer selling futures to lock in price).
• Speculators. No prior exposure; taking a position to profit from price movement. Most of what we'll do as quants falls here.
• Arbitrageurs. Exploiting price differences between related instruments (cash vs. futures, ADR vs. underlying). Helps prices stay consistent across venues.
• Market makers. Quote both bid and ask continuously, earn the spread, provide liquidity.

Why this matters before we touch any math

The number-one reason retail traders lose money is misidentifying their role. They believe they're speculating with edge when they're actually paying the spread to market makers without any informational advantage. Throughout this curriculum, every strategy we discuss will ask: who's on the other side of this trade, and why is it good for them?

Predict before the next lesson

Tomorrow we'll cover the menu of instruments — equities, bonds, futures, options. Before we do:

• Which of those four instrument types do you think has the most participants overall (by number of distinct buyers and sellers)?
• Which has the largest dollar volume traded?

Write your guesses in a note (no peeking). We'll check tomorrow.