What The “Floor Trader” Mean?
Floor traders are members of the exchange who conduct business on the trading floor solely for their own accounts.
Most floor traders at a commodity or stock exchange no longer physically appear in the pit, where the open outcry form of trading was once conducted, and instead use computerised trading systems.
When it comes to the commodity and stock markets, floor traders play a crucial role by increasing liquidity and reducing bid-ask spreads.
A trader on the floor may also be known as a registered competitive trader or a someone who provides liquidity.
KEY POINTS
- Floor traders are members of the exchange who conduct business on the trading floor solely for their own accounts.
- Since electronic trading is more efficient and less expensive, many exchanges have shut down their physical trading floors.
Understanding the Floor Trader
When depicting a securities exchange on film, actors usually play floor traders. Since they are risking their own capital, these traders are generally portrayed as being highly invested in the outcomes of their deals.
Most traders do not work on the floor, and those who do are becoming increasingly rare.
This is because the vast majority of traders who invest their own money now do so electronically rather than in the pit.
Before they may trade on an exchange, floor traders must first pass a screening process.
To become a floor trader, you must submit the following to the National Futures Association: The application must include a completed Form 8-R, fingerprint cards, verification of trading privileges from a contract market, and a non-refundable application cost of $85.
There are different screening processes in place for various markets.
Floor Traders, Market Makers, and Brokers
Floor traders, market makers, and brokers all work out of the same pit, but each has a unique role in the market.
While brokers advocate for their clients, market makers create trading opportunities.
Although they contribute to market liquidity, the primary goal of floor traders is to increase their personal wealth through trading.
But everyone involved wants the finest order execution they can get. A floor broker may be allowed to trade for their personal account in addition to the firm’s or client’s, depending on the rules of the exchange. In this context, one individual can perform the duties of both floor broker and floor trader.
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What’s Next for Trading on the Floor
Since electronic trading is more efficient and less expensive, many exchanges have shut down their physical trading floors.
The future of floor trading is far more dubious now than it was before the 2020 crisis.
Since the pandemic began in March of 2020, numerous stock exchanges, including the New York Stock Exchange, have closed temporarily.
Floor trading is gradually returning to many exchanges, but the outlook for the profession is uncertain.
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