Finance

Floor Trader

Floor Trader

Floor trader refers to a member of a stock or commodity exchange who trades with his or her portfolio on the exchange’s floor. The floor traders must abide by trading rules similar to exchange specialists who trade on behalf of others. The phrase is not to be confused with the term “floor broker.  They are also known as registered competitive traders, individual liquidity suppliers, or locals for instance.

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How do they work?

Floor traders used to use an open outcry method in the pit of the exchange. But now most of them use electronic trading systems and do not appear in the pit. Floor traders provide an important role in commodity and stock exchange by providing liquidity and narrowing bid-ask spread. Floor traders may also be referred to as individual providers or registered competitive traders. Usually, a floor trader trades in derivatives or securities on the trading floor and seeks to make a profit from price swings over the short term.

Features of Floor Trader:

There are various features of floor traders they are as follows:

  • The trader is an investor himself. Means he invests his own money in the market and trade to earn profit
  • As he is investing his own money in the market for trading he can make an independent decision regarding investments such as when to buy a security and when to sell them.
  • The trader works on the floor of the stock exchange, investing in his portfolio

What makes them different from Floor Brokers:

There are various ways investors can trade in the exchange market – invest personally or invest through a trader or a floor broker. For each sale or purchase, the floor trader and floor broker compete with other traders to receive the best possible deal. However, a floor trader trades for his/her account, and a floor broker trades for their client’s accounts.

Due to time constraints, more investors are unable to closely monitor stock fluctuations and market movements. These investors use trading companies to carry out their investments. Most trading companies hire their own floor brokers who invest according to their customer’s or investors’ preferences. A floor trader is known as a local, while a floor broker is known as a pit broker.

Future outlook of floor trading:

The majority of traders in an exchange are not floor traders. With the advancement of electronic trading, floor trading is becoming rare. Electronic trading is becoming cheaper and faster, therefore most of the exchanges do not use trading floors.

However, many exchanges such as the New York Stock Exchange (NYSE) of the United States still utilizes the open outcry method for trading. The open outcry method involves verbal and the use of hand gestures for transferring information regarding buy/sell orders. In the open outcry method, the traders can communicate trade with persons on the trading floor and get a better sense of demand and supply for securities than trading electronically.

However, the future of the trading floor remains uncertain, following the outbreak of the coronavirus (COVID-19) pandemic. This resulted in the closure of trading floors at exchanges across the world beginning in March 2020. Although the trading floors of certain exchanges are opening slowly after the release of the vaccine, the future of floor trading is uncertain.

Types of Floor Trader:

The men and women who trade on the floor of the world’s futures exchange perform a number of different functions; these different types of floor traders could be day traders, place traders, scalpers, and so on.

  1. Day traders: These traders usually buy and sell several times during the day, aiming to buy ahead of rising prices and sell ahead of declining prices, typically holding their positions for several minutes to several hours. Day traders usually risk their own money, through day traders on the floor of the major exchanges manage some commodity funds. These traders are called day traders because they usually offset all of their positions at the end of each day, going home without any future contracts, or “flat” as it is known on the floor
  2. Position Traders: Position traders tend to hold the position for days or weeks. Position traders get their name from the fact that they hold positions (long or short) overnight and take them home. Position traders range from local trading for their accounts, to those actively hedging positions for their firms, to large institutions speculating on the future of prices.
  3. Scalpers: The most essential cog in the pit is the scalper. Scalpers are ultra short-term traders who post bids and offers, always trying to buy the bid and sell the offer, “scalping” the difference of bid-ask spread.
  4. Floor Brokers: Floor brokers act as agents for investor clients, giving the closest thing possible to direct access to the exchange floor. They are in charge of analyzing market data, price levels, and competition on behalf of their clients in order to achieve the best possible trades.

Hence there are some types of floor traders present in exchange there are also floor brokers involved who trade on behalf of their clients.

Bottom Line:

We can conclude that floor trading is a good practice for an individual investor but as the growing IT sector and online trading have reduced very much and due to COVID-19 (pandemic) the floor trading has stopped and the future of floor trading is uncertain.

 

Author – Hariharan Krishnan

About the Author – Hariharan Krishnan is currently in second year BAF and is also doing FRM part 1. He is passionate about financial markets and loves to play chess and outdoor games.

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