Types of Transactions

Value based Transactors: A value based transactor (VBT, hereafter) carries out extensive analysis of publicly available information to establish values. He trades when the difference between the value assessed by him and prevailing market price so warrants. Typically, he places limited orders to buy and sell with a spread that is large enough to provide a cushion against errors of judgment and informational lacunae. For example, a VBT who establishes an intrinsic value of Rs 50 for some equity share may place an order to buy if the net price is Rs 40 or less. VBTs generally serve as the anchor for the trading system and establish the framework for the operations of dealers. VBTs typically don’t place much importance on time.

Information Based Transactors: An information based transactor (IBT hereafter) transacts on the basis of information which is not in public domain and, therefore not reflected in security prices. Since he expects this information to have a significant impact on prices, he is keen to transact soon. To him, time is a great value. While the VBT is concerned about how much the market will move towards the justified price (the price established by him based on fundamental analysis), the IBT is a bothered about how soon the market price will move up or down in response to new information. The IBT generally employs ‘incremental’ fundamental analysis (as he is concerned about price movements in response to new information). In addition, he uses technical analysis because timing is crucial to his operations. Unlike the VBT, he rarely tries to establish the absolute value of a security. Instead he tries to assess the likely impact of ‘marginal’ fundamental and technical developments.

Liquidity Based Transactors: A VBT, like an IBT trades to reap investment advantage. A liquidity based transactor (LBT, hereafter) however, trades primarily due to liquidity considerations. He trades to deploy surplus funds or to obtain funds or to rebalance the portfolio. His trades are not based on a detailed valuation exercise (as is the case of a VBT) or access to some information that is not already reflected in market price (as is the case of an IBT). Hence, he may be regarded as an information less trader who is driven by liquidity considerations.

Pseudo information Based Transactors: A pseudo information based transactor (PIBT, hereafter) believes that he possesses information that can be a source of gain, even though that information is already captured or impounded in the price of the security. Or, he exaggerates the value of new information that he may come across and forms unrealistic expectations. Essentially, the PIBT, like the LBT, is an information less trader. Yet, he mistakenly believes that he possesses information which will generate investment advantage to him.

Dealers: A dealer intermediates between buyers and sellers eager to transact. The dealer is ready to buy or sell with a spread which is fairly small for actively traded securities. For example, the bid and ask prices of a dealer for a certain security may be 80-82. This means that the dealer is willing to buy at 80 and sell at 82. The dealer’s quotations may move swiftly in response to changes in the demand and supply forces in the market. Typically the dealer’s bid ask price band lies within the bid ask price band set by the VBT. This means that the bid price of the dealer is higher than the bid price of the VBT and the ask price of the dealer is lower than the ask price of the VBT. The dealer’s function is such that he is not required to take a view on whether a security is worth buying or worth selling. He simply plays the role of an intermediary and he does not plan to hold the position he acquires in accommodating a transaction. Hence, the dealer is remarkably innocuous person. Lurking behind the dealer, of course, is the transactor’s real trading adversary, whose identity and motive are often unknown.