The counterparty is defined as the other party in a financial transaction. It is related to the law of supply and demand in investments in the Stock Market.
The counterpart is the opposite party. For example, the buyer is the counterparty of the seller and, at the same time, the seller is the counterparty of the buyer. The same would happen in a loan. Thus, the borrower is the counterpart of the lender and vice versa.
Importance of a counterpart
Let's imagine that there is an investor who wants to buy a financial asset, the counterpart will be the person or institution that sells that financial security, that is, carries out the opposite operation so that he can marry the purchase of this investor.
The counterparty can be another person, a financial institution, a company or a market maker. This concept is of vital importance for there to be liquidity and for there to be a trading market, since without it we would only have one leg in the operation and it would not be possible to marry, therefore, there would be no operation or trading market.
Access to information in the markets
Access to information in financial markets is highly asymmetric. There are investors who have more information than others, in this regard, institutional investors will have more information than the individual investor since, for example, they will be able to see the orders that their clients enter and with that information, they will enter positions in the market offering counterparty to other investors.
We must bear in mind that this information, since a very important percentage loses money in the Stock Market. In this way, the counterparty with more information will have a broader sample of what investors are doing and will be able to benefit from this situation.
The role of regulators
It is the task of regulators and the new laws that are coming to control this abuse of information, with the aim of avoiding price manipulation and exercising a dominant position in the market. Regulators must be stricter and more accurate in their controls so that there is equal opportunities for all investors.
How do investment banks do it?
Another separate issue is technology, the large global investment firms have very powerful systems that act by creating liquidity in return for milliseconds and allowing them to take advantage of market failures.