Trading has become increasingly digitalized, and the market has also become significantly electronic. Floor traders are relatively conventional kinds of traders that execute transactions from the floor of the exchange; floor traders use the open outcry method; however, most of them use electronic trading systems and do not appear in the pit.
History Of Floor Trading
Floor traders were individuals of the physical security exchange that took customer orders over the phone. These traders used to undertake the obligation to either trade against the order themselves, or they’d go ahead and find another trader in the pit who would take the other side of the trade.
The primary target of floor traders is to make a 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 regulations of the exchange they carry out trades in.
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 in their 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 that they used to buy on the bid price and sell on the asking price. The spread became the profit. To make sure they made a sufficient amount of profit, floor traders used to make sure they had an adequate amount of trades happening within a single day. Along with that, these traders also made sure that their position was adequately balanced and not tilted towards one side more than the other.
These traders were able to judge and evaluate when the market was off the line by a tick or by 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 Do Floor Traders 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 a circular area, and traders often refer to it as 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 kind of 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 on the floor 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 that look for temporary disbalances and make quick buy-sell decisions to make money.
Next are hedgers. Hedgers are the floor traders that represent a commercial firm. Hedging stocks can be done by taking a position in one market opposite from the position in another market.
Spreaders deal with related commodities, and they also 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 out a profit. In essence, these are floor traders and what they do.
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 out a chaotic or crazy impression, the system is actually very organized. With more and more automation, floor trading has gone on to become more organized.
Face-to-face trading adds a level of simplification to most orders. Once you start working with different traders, you start recognizing their patterns and their differences.
In most cases, you also start incorporating strategies that you believe 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 do the running for him. With 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 that work on strategic trading. The market never sleeps and now you have a plethora of different trading vehicles that you can use.
Floor Traders Final Thoughts
24-hour markets where the prices move up and down mean that 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 possess the ability to read people may be at an advantage when picking up non-verbal cues on the motives and counter parties’ intentions. Human interaction also places individuals in a better position when they are running complex trades. Some traders still prefer floor trading, albeit the number of people still engaging in floor trading has drastically decreased.