What Is a Floor Trader?
A floor trader is an exchange member who executes transactions from the floor of the exchange, exclusively for their own account. Floor traders used to use 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. They fulfill an important role in commodity and stock market by risking their own capital to trade futures, options or stocks, thereby providing liquidity and narrowing bid-ask spreads. Floor traders may also be referred to as individual liquidity providers or registered competitive traders.
Understanding Floor Trader (FT)
Floor traders are the traders typically represented in movies and other forms of media when a scene of a securities exchange is shown. These traders are often depicted as being emotionally invested in the trades they are executing because they are trading with their own money. In reality, most traders are not floor traders, and floor traders are rare, primarily because traders who use their own money have switched to electronic trading, which is not conducted in the pit.
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.
FTs, Market Makers, and Floor Brokers
Floor traders are in the pit with market makers and brokers, but they play a different role in the market. Brokers work on behalf of clients while market makers provide liquidity. Floor traders are searching for 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 single person can be both a floor broker and a floor trader.
FTs and the Future
In the past, floor traders, market makers, and floor, brokers in the pit constituted a majority of the market action. Now, most trades have moved to computers and market makers and floor traders are a rarer sight. Brokers still trade in the pit, but the numbers are a fraction of what they were at the peak of pit trading. Some argue that computer systems can fail, so humans are needed to trade in the pit in case of a system malfunction, but this is not a strong argument since if the electronic systems failed, trading would simply halt until the system restored itself. There is no real need for floor traders anymore, so they are likely to disappear within the next decade.