What Is a Floor Broker?
A floor broker, also known as a "pit broker," is an independent member of an exchange who is authorized to execute trades for clients on the exchange floor. Floor brokers are primarily active on stock exchanges but can also be found on other exchanges, such as futures and options exchanges.
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.
With the advent of electronic trading, floor brokers are less common in the financial markets as they once were.
- Floor brokers are members of exchanges in which they execute trades for clients on the exchange floor.
- The goal of a floor broker is to find the best price possible for their client by bidding against other traders.
- Typically clients for floor brokers include financial institutions, high-net-worth individuals, and large corporations.
- Today, floor traders are assisted by advanced computers and trading algorithms that help them compete with fully automated trading platforms.
- Electronic trading has largely replaced floor brokers, allowing for the faster and more affordable execution of trades with greater accuracy.
- Floor brokers are regulated by the exchanges they work for and the Securities and Exchange Commission (SEC).
Understanding a Floor Broker
Floor brokers 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. The New York Stock Exchange (NYSE) floor brokers are known for the iconic blue jackets which they wear on the trading floor.
The key challenge faced by floor brokers is to obtain the best possible trade execution on behalf of their clients, meaning the best price, by bidding against other traders to receive the best terms available for every purchase or sale.
Upon completing their orders, the floor broker will notify the client by way of the client's registered representative. Floor brokers receive a commission for the trades they execute.
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.
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.
Floor Brokers and Technology
Although floor brokers historically relied primarily on written notes, their famous hand gestures, and verbal communication in order to make their trades, known as open outcry, 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 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 Today
As of 2020, floor brokers are relatively few in number, with only 22 firms maintaining floor brokers at the NYSE, as compared to several hundred firms in previous decades.
The decline of floor brokers is due to the advent of electronic trading, whereby clients can directly access the stock exchanges and execute their own trades. Clients no longer have to pay commissions on their trades, which means that they can execute trades more often and more freely as well as using the additional capital saved from paying commissions towards investing.
One of the biggest benefits of electronic trading is that it allows trades to be executed in milliseconds compared to the seconds or minutes it takes floor brokers. The greater speed and technology allows for more accurate pricing and orders to be completed much faster. Electronic trading removes the chance of human error.
That being said, many people still feel that floor brokers are better suited to complex trades in which they can work with other traders to get a better price than a computer could generate. However, electronic trading will continue to dominate, making floor brokers a relic of the past.