What Is a Small Trader?

A small trader is a market participant whose trading activities involve transaction sizes small enough to be exempt from specific regulatory requirements. Commonly, this term is used to describe retail traders or small financial firms with relatively low trading volumes.

In contrast, large traders are obligated to register with regulatory bodies and submit regular reports detailing their trading activities. Notably, large traders must register with the Securities and Exchange Commission (SEC) by filing Form 13H.

Key Points to Note:

• A small trader engages in buying and selling securities with relatively small transaction sizes.
• The majority of retail traders fall into this category.
• Small traders are exempt from certain registration and reporting obligations.

Understanding Small Traders

Various exchanges have different criteria to determine the size at which a market participant needs to make special disclosures about their trades. For the SEC, a trader is considered small if their daily trading volume is below two million shares or $20 million during any calendar day, or below 20 million shares or $200 million during any calendar month. In practice, the vast majority of market participants fall under the small trader category, except for ultra high net-worth individuals and very large firms.

Regulators ascertain the number of small traders in the market by deducting the volume reported by large traders from the total marketplace volume. The remaining volume is attributed to small traders, although individual small traders are not typically identified using this method.

Small traders are subject to less regulatory scrutiny compared to large traders due to their perceived limited ability to impact or manipulate the market. Their trading decisions usually do not significantly influence security prices, and attempts to corner the market are unlikely to succeed. Additionally, the administrative costs of monitoring small traders’ activities are generally considered prohibitive for regulators.

Real-World Example of a Small Trader

An illustration of where small traders are identified by regulators is the Commitments of Traders (COT) report issued by the Commodity Futures Trading Commission (CFTC). This report, published weekly, details the size and direction of positions taken in a specific commodity, classifying traders into commercial, non-commercial, and non-reportable categories.

The non-reportable traders category includes small traders whose position sizes do not necessitate active reporting or monitoring as per CFTC guidelines. Other regulatory bodies and financial institutions, such as clearinghouses and brokerage firms, typically follow similar protocols when overseeing and disclosing their clients’ trades.