Floor Trader (FT)
An exchange member conducts transactions only for their account from the exchange floor.
What is a Floor Trader?
A floor trader is an exchange member conducting transactions only for their account from the exchange floor. In the past, floor traders operated in the pits of commodities or stock exchanges, utilizing the open outcry method.
However, most of them use computerized trading systems and do not physically appear in the pit nowadays.
Some traders operate as market makers, giving the market liquidity. The traditional function of floor traders has decreased with the introduction of electronic trading because most trading now occurs on digital platforms.
Market makers, a subset of floor traders, play a pivotal role in providing liquidity to the market. The traditional functions of floor traders have diminished due to the prevalence of electronic trading, which has become the primary mode of transactions.
In the commodities and equity markets, floor traders play a crucial role by supplying liquidity and reducing bid-ask spreads. Other names for floor traders include registered competitive traders and individual liquidity providers.
Key Takeaways
- Floor traders can serve as market makers to offer liquidity, represent themselves or their companies, and have a focus on particular markets.
- The advent of computerized trading, characterized by speed and cost efficiency, has led to a decline in floor trading.
- Floor traders may choose to focus on particular instruments or markets in which they are well experienced.
- Traders and investors have multiple options while trading in the exchange market: they can invest or trade directly through another trader or a floor broker.
Understanding Floor Traders
When a scene of a securities exchange is depicted in a film, floor traders are usually the traders that are featured. Because they are trading with their own money, these traders are frequently portrayed as having a strong emotional attachment to their deals.
Since most traders who use their own money now trade electronically, which takes place outside of the pit, most traders are actually not floor traders, and floor traders are becoming fewer and farther between.
One can engage in either pure floor trade, pure electronic trade, or a hybrid. The significance of in-person human trading floors has diminished with the rise of electronic trading, which offers enhanced features and efficiency.
While both approaches enhance price discovery and liquidity, electronic trading offers more features that make it more appealing.
Improving stock markets' liquidity and informativeness results in a decrease in the cost of capital. However, there is also the view that an electronic trading system may not provide as much relevant information as floor trading if a large number of data is involved.
Most traders on the trading floor purchase and sell stocks via other channels, including the phone and internet. Open outcry trading is one of the most popular trading strategies. On the trading floor, traders use this communication channel when purchasing and selling stocks.
As they share the offers and bids, traders frequently let out loud screams. To convey their bids, some dealers often utilize forceful hand signals.
The trading floor is a bustling center, and the social lives of traders are distinct. A lot of merchants choose non-formal contracts. Because these agreements depend on the traders' honesty, the integrity of the company they represent is jeopardized if a trader breaks a casual contract.
What are Trading Floors?
Trading floors are physical locations like exchanges or funds that have traders trade financial instruments like stocks, currencies, commodities, and more.
The New York Stock Exchange (NYSE) and the Chicago Board of Trade (CBOT) are the most popular exchanges with trading pits. Traders from investment banks, hedge funds, and more can trade with the institution’s money in the exchange.
On trading floors, one could encounter a wide variety of traders. The most prevalent are floor brokers, whose job is to trade on behalf of customers. Position traders, spreaders, scalpers, and hedgers are more categories of traders.
Trading floors are also possible for brokerages, investment banks, and other trading-related businesses. Trading floors also have offices that complete transactions over the Internet or on the phone.
How to Become a Floor Trader
There are various prerequisites and requirements to become a floor trader. Although not required, having some education in finance or economics can be helpful. Significant financial resources are required, particularly for independent traders.
Here are some tips on becoming a floor trader:
- Security Manager Designation: To gain safe access to the NFA Online Registration System (ORS), enroll as a security manager.
- Experience: To acquire real-world experience, many floor traders begin their careers as clerks or helpers on the trading floor. This is particularly crucial if you want to work as a market maker or for a brokerage company.
- Market Knowledge: You must possess knowledge of the financial instruments you plan to trade, including but not limited to stocks, commodities, options, and other derivatives. You must understand trading tactics, risk management, and market patterns.
- File Form 8-R: Fill out online Form 8-R and submit it to NFA, following all the requirements.
- Fingerprint Submission: The applicant's fingerprints on a fingerprint card supplied by the National Futures Association must be attached to Form 8-R.
- Proof Submission: Contract markets and Swap execution facilities, or SEFs, must provide documentation about their trading privileges. Contract markets and SEFs have the option to submit evidence in ORS following the filing of their applications.
- Payment: There is a $85 application fee that is non-refundable.
- Capital Requirement: You'll need a sizable amount of trading cash if you wish to become an independent floor trader. Although the precise amount varies, it might be significant since you're effectively trading with your money.
Types of Floor Traders
The men and women who work as floor traders on the global futures exchange execute various tasks; these floor traders may be scalpers, place traders, day traders, or any combination of these.
Here are the types of floor traders:
- Day Traders: Day traders are characterized by short holding periods ranging from a few minutes to several hours. They frequently buy and sell throughout the day, aiming to capitalize on short-term market movements. While some manage commodity funds, many day traders risk their capital.
- Position Traders: Traders that take positions typically hold them for a few days or weeks. Position traders take their positions—long or short—home at night, which is how they earn their moniker. Position traders might be anyone trading locally for their accounts, actively hedging positions for their companies, or big institutions betting on future price movements.
- Scalpers: The scalper is the most important part of the pit apparatus. Extremely short-term traders known as "scalpers" post bids and offers intending to always buy the bid and sell the offer, hence "scalping" the difference between the bid-ask spread.
- Hedger: By acquiring positions in an asset offset from the investor's present holdings, hedging aims to reduce the price volatility linked with that asset.
Floor Trader vs. Floor Broker
Investors in financial assets can trade on the exchange market directly, through a brokerage, or through member firms that use floor brokers.
Moreover, investors who are time-constrained or have other obligations at work find it difficult to attend the market or keep a regular eye on it; as a result, they turn to trade organizations to carry out their investments.
Here are the differences between floor traders and floor brokers:
| Floor Trader | Floor Broker |
|---|---|
| Floor traders carry out a transaction for their own accounts. | Floor brokers represent their customers' interests. |
| Floor traders are referred to as locals, independent liquidity providers, or registered competitive traders. | Floor brokers are known as pit brokers. |
| Floor traders trade for their profit or their banks’ or other institutions’ money | Floor brokers do not trade for personal gain; they are paid in commissions for their services. |
| Floor traders risk more money because they use their or any institution’s funds. | Floor brokers don’t risk much because they only execute trades on their clients' behalf. |
Conclusion
A floor trader is a professional who deals with money on a real trading floor, usually in a stock market. They are essential to the market dynamics because they maintain price efficiency and provide liquidity.
Floor traders are renowned for their quick decision-making and in-depth understanding of market psychology.
While physical trading floors have diminished in importance due to computerized trading, floor traders continue to play an important role in providing liquidity and maintaining market efficiency.
Their expertise in market dynamics and quick decision-making abilities contribute to the human element in the financial markets, even in the digital age. Their capacity to decipher market signals and communicate with other traders is still a useful aptitude.
The public outcry technique is rarely used for physical trading on exchanges. Very few systems use the method of public uproar. For example, the London Metal Exchange still has the public outcry technique.
Furthermore, despite the chaotic or insane appearance that the open outcry system may give off, it is ultimately a highly ordered system. Floor trading has grown increasingly organized as automation has increased.
A man pushes buttons on a laptop these days, and electrons take care of the rest. Everyone has access to opportunities in the digital world.
The digital world is the best place for strategic traders to operate. You can choose from various trading instruments; the market is always active.
Floor traders have always been important participants in the market, and in the ever-changing world of financial trading, their expertise is still valued.
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