Scalpers and Scalping

What is a scalper? What is scalping?

A scalper is a speculator on the trading floor of an exchange who buys and sells rapidly, with small profits or losses, holding his positions for only a short time during a trading session. Typically, a scalper will stand ready to buy at a fraction below the last transaction price and to sell at a fraction above, e.g., to buy at the bid and sell at the offer or ask price, with the intent of capturing the spread between the two, thus creating market liquidity. (Source: CFTC)

Scalping is simply playing the spread. Scalpers attempt to act like traditional market makers or specialists. To make the spread means to simply buy at the Bid price and sell at the Ask price, to gain the bid/ask difference. This procedure allows for profit even when the bid and ask don't move at all, as long as there are traders who are willing to take market prices. It normally involves establishing and liquidating a position quickly, usually within minutes to even seconds.

The role of a scalper is actually the role of market makers or specialists who are to maintain the liquidity and order flow of a product of a market.

A market maker is basically a specialized scalper. The volume it trades are many times more than the average individual scalpers. It has sophisticated trading systems to monitor its trading activity. However it is bound by strict exchange rules while the individual trader is not. For instance, NASDAQ requires each market maker to post at least one bid and one ask at some price level, so as to maintain a two-sided market for each stock it represents.

Due to role overlapping, a scalper is always competing with the market maker for profits. Unfortunately, the low-end scalper is almost always at a disadvantage due to the following market maker's advantages:

1. superior execution speed as an insider
2. a greater knowledge of trading and the actual market situation due to its information gathering capacity
3. huge amount of capital to backup and support market makers
4. the ability to provide false impression to the market by placing a larger/smaller bid or ask to bluff the trader

(Source: Wikipedia)