What Is a Floor Trader?
Let me tell you directly: a floor trader is an exchange member who executes transactions from the floor of the exchange, exclusively for their own account. You might remember them using the open outcry method in the pit of a commodity or stock exchange, but now most of them use electronic trading systems and do not appear in the pit.
Floor traders fulfill an important role in commodity and stock markets by providing liquidity and narrowing bid-ask spreads. Floor traders may also be referred to as individual liquidity providers or registered competitive traders.
Key Takeaways
- A floor trader is an exchange member who executes transactions from the floor of the exchange, exclusively for their own account.
- Floor trading has become increasingly rare as electronic trading has become faster and cheaper, with many exchanges closing their trading floors altogether.
Understanding the Floor Trader
When you see scenes of securities exchanges in movies, those are the floor traders I'm talking about—often shown as emotionally invested because they're trading with their own money. In reality, most traders aren't floor traders, and floor traders are increasingly rare, mainly because those using their own money have switched to electronic trading, which isn't done in the pit.
You need to know that a floor trader is required to pass a screening process before trading on an exchange. The National Futures Association requires floor trader applicants to file the following: Form 8-R completed online, fingerprint cards, proof from a contract market that the individual has been granted trading privileges, and a non-refundable application fee of $85. Other exchanges have their own screening requirements.
Floor Traders, Market Makers, and Brokers
Floor traders are in the pit with market makers and brokers, but they play different roles. Brokers work on behalf of clients while market makers mostly provide liquidity. Floor traders also provide liquidity, but their primary motivation is making profits with their own money. However, all parties are looking for the best order execution possible.
Depending on the rules of the exchange, a floor broker may be given permission to trade for their own account in addition to that of the firm or client they represent. In this case, a person can be both a floor broker and a floor trader.
The Future of Floor Trading
Floor trading has become increasingly rare as electronic trading has become faster and cheaper, with many exchanges closing their trading floors altogether. The 2020 crisis has added more uncertainty to the future of floor trading. The outbreak led the New York Stock Exchange and many others to temporarily close their trading floors beginning in March 2020. Many exchanges are resuming floor trading in phases, but the future of the floor trader as an occupation is anything but assured.
Other articles for you
Internal controls are essential mechanisms for ensuring financial integrity, regulatory compliance, and fraud prevention in businesses.
A qualified annuity is a retirement savings plan funded with pre-tax dollars, offering tax deferral until withdrawal, unlike non-qualified annuities funded with after-tax dollars.
An elevator pitch is a short speech designed to outline an idea and spark interest in a product, service, or project.
Mark-to-market accounting values assets and liabilities at current market prices for transparency but can cause volatility during market disruptions.
Economic justice focuses on creating fair economic systems that provide everyone with opportunities for a dignified life through equitable wealth distribution and access.
A Request for Proposal (RFP) is a document used by organizations to announce projects and solicit competitive bids from contractors.
A debt collector recovers money owed on delinquent accounts for creditors or themselves after purchasing the debt.
A sublease lets an existing tenant rent out their leased property to a new tenant while staying responsible for the original lease.
A haircut in finance refers to a reduction in an asset's value, often applied to collateral in loans or in market maker spreads to manage risk.
Qualifying ratios are financial metrics lenders use to evaluate a borrower's debt relative to income for loan approvals.