Small Trader: What It Is, How It Works, Example

What Is a Small Trader?

A small trader refers to a market participant whose buying and selling activity is small enough for them to be exempt from certain regulatory requirements. It is often used to refer to retail traders or small financial firms, whose trading volumes are relatively low.

Large traders, by contrast, are required to register with regulators and regularly file reports disclosing their activities. For example, large traders must register with the Securities and Exchange Commission (SEC) by filing Form 13H.

Understanding Small Traders

Different exchanges will have separate standards relating to how large a particular market participant can be before they are required to make special disclosures about their trades. In the case of the SEC, a trader is small if their daily trading volume is less than either two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month. In practice, therefore, practically all market participants are small traders, aside from ultra high net-worth individuals and very large firms.

Generally speaking, regulators determine the amount of small traders active in the market by taking the total volume for the entire marketplace and subtracting the volume reported by large traders. The remainder is of course attributable to small traders, though this methodology does not require the individual small traders to be identified.

The reason that small traders do not face the level of regulatory scrutiny required of large traders is that they are presumed to have a lesser ability to influence or manipulate the market. For instance, small traders’ trading decisions are unlikely to have a significant influence on the overall price of a given security, and small traders are very unlikely to succeed in deliberately cornering a market. At a practical level, regulators would also struggle to scrutinize small traders' activities because the administrative burden of doing so would be prohibitively expensive.

Real-World Example of a Small Trader

One example of where small traders are identified by regulators can be found in the Commitments of Traders (COT) report issued by the Commodity Futures Trading Commission (CFTC). The COT report is published every Friday, and it outlines the size and direction of all positions taken in a particular commodity, dividing this data into trades made by commercial traders, non-commercial traders, and non-reportable traders.

This last category, non-reportable traders, includes small traders whose position sizes are too low to require active reporting or monitoring under the CFTC's guidelines. Other regulators and financial intermediaries, such as clearinghouses and brokerage firms, typically follow similar procedures when monitoring and disclosing their clients’ trades.