What Is a Floor Broker?
Because of the limited space available on the physical trading floor, floor brokers are relatively rare. They generally represent larger clients, such as financial service firms, investment funds, and high-net-worth individuals.
- Floor brokers execute trades on behalf of institutional and high-net-worth clients.
- They are independent members of the exchanges on which they trade, and they work from physical trading floors.
- Today, floor traders are assisted by advanced computers and trading algorithms that help them compete with fully automated trading platforms.
Understanding Floor Brokers
The key challenge faced by floor brokers is to obtain the best possible trade execution on behalf of their clients, bidding against other traders to receive the best terms available for every purchase or sale. Upon completing their orders, the floor broker would notify the client by way of the client's registered representative.
Importantly, floor brokers are distinct from floor traders. Floor brokers act as agents on behalf of their clients, and they are independent members of the exchange on which they trade. By contrast, floor traders execute trades for their own proprietary accounts.
Although floor brokers historically relied primarily on written notes and verbal communication in order to make their trades, today they also use an array of handheld and stationary computers in order to receive and transmit trade orders while working on the trading floor. In fact, some exchanges, such as the New York Stock Exchange (NYSE), have even provided algorithmic trading software and other automation solutions to its floor brokers in order to help them better compete with exchanges that are fully automated. Similarly, the NYSE also allows its floor brokers to trade in stocks that are not listed on the NYSE.
Floor Brokers and Designated Market Makers
In the United States, floor brokers and designated market makers (DMMs) are represented by the Alliance of Floor Brokers (AFB), a trade association of more than 800 members.
Real World Example of a Floor Broker
FBs are often seen in media depictions of trading at the major exchanges, especially when notable market events are occurring, such as a popular initial public offering (IPO) or a dramatic market crash. Today, floor brokers are relatively few in number, with only about 35 firms maintaining floor brokers at the NYSE—as compared to several hundred firms in previous decades. These NYSE floor brokers are known for the iconic blue jackets which they wear on the trading floor.
Floor brokers fall under the regulatory oversight of the Securities and Exchange Commission (SEC), which is responsible for conducting investigations and enforcement operations in cases where the reputation of an exchange or its brokers' trading activities are in question. The SEC may conduct such operations in instances where there is evidence of front-running, insider trading, or other illegal activities.