Floor Trader (FT)

A Floor Trader (FT), sometimes referred to as a Floor Broker, is an individual who trades securities on the floor of an exchange for their own account. Floor traders are typically members of stock or commodities exchanges and are often seen in the trading pits, a physical location where trading activities are conducted. They play a critical role in the market, providing liquidity and reducing transaction costs for other market participants through their trading activities.

Functions and Roles

Floor traders can be seen as the lifeblood of traditional open-outcry exchange systems. They perform several functions:

  1. Liquidity Providers: Floor traders facilitate trading by providing liquidity. By making markets, they ensure that there’s always a counter-party willing to trade, thereby reducing the bid-ask spreads - the difference between the buying and selling prices.

  2. Arbitrage: They engage in arbitrage opportunities between different exchanges or different contracts. This involves buying and selling the same security in different markets to take advantage of price discrepancies.

  3. Market Information: Due to their direct involvement on the exchange floor, they have access to real-time market information, which can influence their trading strategies.

  4. Execution of Large Orders: They help in executing large institutional orders that might be difficult to fulfill electronically due to their size or complexity.

Trading Strategies

Floor traders use a variety of strategies to capitalize on market movements:

  1. Scalping: This involves making numerous trades over a short period to capture small price differences. The objective is to accumulate small profits that add up over time.

  2. Market Making: They place buy and sell orders simultaneously to profit from the spread. The goal is to earn the difference between the buying and selling price while providing market liquidity.

  3. Trend Following: Floor traders might follow and capitalize on market trends. They buy securities that are trending upwards and sell those that are trending downwards.

  4. Arbitrage: This strategy involves exploiting price discrepancies between different markets or securities. The floor trader will buy low in one market and sell high in another.

Changes in Technology and Their Impact

With the advent of electronic trading, the role and prevalence of floor traders have diminished significantly. Electronic trading platforms, such as the New York Stock Exchange’s (NYSE) Arca and Nasdaq are examples where trading has shifted from physical floors to online systems.

Accessibility and Speed

Cost Reduction

Transparency and Regulation

The Shift to High-Frequency Trading (HFT)

High-frequency trading (HFT) firms use sophisticated algorithms to execute large volumes of trades at extremely high speeds. These firms have largely taken over the role of traditional floor traders in providing liquidity.

Future of Floor Trading

Despite the decline in their numbers, floor traders have not been entirely phased out. Several exchanges still maintain physical trading floors, notably the NYSE and the Chicago Mercantile Exchange (CME). These floors continue to serve important roles in price discovery and maintaining market operations during times of significant volatility.

Professional Organizations and Further Reading

In summary, floor traders have historically been vital components of market operations, providing liquidity and facilitating large trades. While their role has evolved with technological advancements, the foundational principles of market making and liquidity provision continue to underlie modern trading practices.