Floor traders are relatively conventional traders who execute transactions from the exchange floor; floor traders use the open outcry method; however, most use electronic trading systems and do not appear in the pit. Trading has become increasingly digitalized, and the market has become significantly electronic.
Floor traders were individuals of the physical security exchange who took customer orders over the phone. These traders used to undertake the obligation to trade against the order or find another trader in the pit who would take the other side of the trade.
The primary target of floor traders is to profit with their own money and help provide liquidity for their clients. A floor trader may make trades according to the client’s demands.
They could also engage in similar trades themselves from their account. However, that depends on the exchange regulations in which they carry out trades.
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Floor Traders Introduction
Floor trading is a dying profession with the advent of technology and new technical indicators that help indicate a stock’s performance. Most floor traders didn’t have all these facilities available at the time. Even without these facilities, a large number of floor traders would turn up a good profit. Most floor traders were able to generate a profit via market making.
This meant they used to buy on the bid price and sell on the asking price. The spread became the profit. To ensure they made a sufficient profit, floor traders used to ensure they had an adequate amount of trades happening within a single day. These traders also ensured that their position was adequately balanced and not tilted towards one side more than the other.
These traders could judge and evaluate when the market was off the line by a tick or more than a tick and then move ahead and capitalize on that. The spreads were also huge because most trading was done pre-decimalization.
What They Do
Floor traders buy or sell securities on behalf of their clients or on behalf of the organization that they work for. The trading floor is circular; traders often call it the “pit.”
Most traders buy and sell securities on the trading floor via telephone, the Internet, and other methods. The most common trading methods involve using open outcry. This is where traders communicate for buying and selling securities on the trading floor.
Traders often scream at the top of their lungs while sharing the offers and the bids. Some traders also make use of vigorous hand signals to communicate their bids.
The trading floor is a very active hub, and traders have a different social life. Many traders opt for informal types of contracts. These contracts are based on the integrity of the traders; if a person walks out of a casual contract, the entire integrity of the firm they are representing is affected.
Whenever two traders agree on a deal, the clearing member of each trader informs the clearinghouse of that deal, and the clearinghouse tries to match that deal from both sides. The trading floor has many different types of brokers with different jobs.
What Are Traders Doing on the Floor?
Floor brokers are the most common types of traders. They trade on behalf of clients. Floor brokers can be independent or affiliated with an agency. Then there are scalpers. Scalpers are the traders who look for temporary disbalances and make quick buy-sell decisions to make money.
Next are hedgers. They are the floor traders that represent a commercial firm. Hedging stocks can be done by taking a position in one market opposite from another.
Spreaders deal with related commodities and take an opposing position in the market to affect the prices in a related market. Next, let’s look at position traders.
Position traders hold positions for an extended period. As a result, their risk exposure is increased. Position traders need to ensure that they always turn a profit. In essence, these are floor traders and what they do.
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Is Floor Trading Dead?
Nowadays, very few exchanges have trading that takes place physically through the public outcry system. Very few systems adopt the public outcry method. The open outcry method, however, is still performing better.
And while the open outcry system may give a chaotic or crazy impression, the system is very organized. With more and more automation, floor trading has become more organized.
Face-to-face trading adds a level of simplification to most orders. You recognize their patterns and differences once you start working with different traders.
In most cases, you also start incorporating strategies that resonate with you. With the development of technology, there’s no longer a need for manual labor for floor trading.
Now, a man presses buttons on a laptop, and electrons run for him. In the digital world, opportunities are available to everyone. Now, your speed (and your height) doesn’t matter. The digital world is the best time for individuals who work on strategic trading. The market never sleeps, and now you can use many different trading vehicles.
Final Thoughts
24-hour markets where the prices move up and down mean a risk control plan can be executed efficiently. However, the electronic system hasn’t been able to replace the trading system completely yet. The electronic system lacks a human element.
Therefore, floor traders who can read people may be advantaged when picking up non-verbal cues on the motives and counter parties’ intentions. Human interaction also places individuals in a better position when running complex trades. Some traders still prefer floor trading, albeit the number of people still engaging in floor trading has drastically decreased.
