Trading Floor

What Is a Trading Floor?

A trading floor refers to a physical area wherein trading activities in financial instruments, such as equities, fixed income, futures, and options, take place.

Trading floors are situated in the buildings of various exchanges, such as the New York Stock Exchange (NYSE) and the Chicago Board of Trade (CBOT). Trading floors may also exist as the center of trading activity within a financial firm such as an investment bank or hedge fund.

Key Takeaways

  • A trading floor is a physical location where securities trading and related activities take place.
  • Trading floors may be located at sites of securities exchanges (e.g., the NYSE) or as centers of trading activity within financial firms' offices.
  • Open-outcry was the primary trading method used on trading floors before the rise of electronic trading.
  • Today trading floors still exist but are limited in their scope and capacity as they have been replaced by screens and algorithmic trading.

Understanding Trading Floors

The trading floor is composed of pits on an exchange. This is because the trading floor was somewhat circular with steps recessed into the floor, where traders had to step into the arena to conduct their transactions. Factor in the hectic, frenzied nature that accompanies this type of activity, and one can see that the moniker is quite descriptive.

Many different types of traders could be found on trading floors. The most common are the floor brokers, who are tasked with trading on behalf of clients. Other types of traders include hedgers, scalpers, spreaders, and position traders.

Brokerages, investment banks, and other firms involved in trading activities can also have their own trading floors. In these cases, the trading floor refers to the physical office location that houses the trading division, which can complete transactions over the internet or telephone.

With the advent of electronic trading platforms, many of the trading floors that once dominated market exchanges have disappeared as trading has become more electronically based.

NYSE Trading Floor

The NYSE trading floor is located at 11 Wall Street in New York City and has been in its current location since 1865. The exchange installed telephones in 1878, which provided investors with direct access to traders on the NYSE trading floor. Today, most of the transactions that take place on the trading floor are automated and executed in less than a second. A bell is rung on the trading floor to signal the opening and closing of each day’s trading.

In an era where trading floors are becoming a relic of the past, the NYSE announced in 2017 that it would allow all U.S. stocks and exchange-traded funds to trade on its trading floor, increasing the number of securities that could be traded on the trading floor from roughly 3,500 to about 8,600. This expansion was completed in the first half of 2018.

Trading Floors and the Open Outcry Method

The open outcry was the primary trading method used on trading floors before the rise of electronic trading. The method uses verbal and hand signal communications to convey information, such as a stock’s name, the quantity the broker wants to trade, and the desired price.

For example, a broker might raise their hand if they wish to increase their bid. Trades executed using the open outcry method form a contract between individuals on the trading floor and the brokerages and investors they represent.

In 2017, the U.S. Securities and Exchange Commission (SEC) has given approval for BOX Options Exchange (BOX), also based in Chicago, to conduct open outcry dealing on their trading floor, a win for this trading method. Cboe Global Markets (Cboe) uses both an electronic and a traditional open cry trading floor and is expanding its Chicago location in mid-2022.

The Death of the Trading Floor

While trading floors are paradigmatic of securities trading, they have been largely replaced by computer screens, electronic markets, and algorithmic trading.

Instinet was the first major electronic alternative to the trading floor, arriving in 1967. With Instinet, clients (institutions only) could bypass the trading floors and deal with each other on a confidential basis. Instinet was a slow grower, not really taking off until the 1980s, but has become a significant player alongside the likes of Bloomberg and Archipelago (acquired by the NYSE in 2006).

Nasdaq started in 1971, but didn't really begin as an electronic trading system; it was basically just an automated quotation system that allowed broker-dealers to see the prices other firms were offering (and trades were then handled over the phone). Eventually, Nasdaq added other features like automated trading systems. In the wake of the 1987 crash, when some market makers refused to pick up their phones, the Small Order Execution System was launched, allowing electronic order entry.

Other systems followed. CME's Globex came out in 1992, Eurex debuted in 1998 and many other exchanges adopted their own electronic systems.

Given the benefits of the electronic systems and the clients' preference for them, a very large percentage of the world's exchanges have converted to this method. The London Stock Exchangewas among the first major exchanges to switch, making the conversion in 1986. The Borsa Italiana followed in 1994, the Toronto Stock Exchange switched in 1997 and the Tokyo Stock Exchange switched to all-electronic trading in 1999. Along the way, many major futures and options exchanges have likewise made the switch.

Today, the United States is more or less alone in maintaining some semblance of open outcry exchanges. Major commodity and options exchanges like Cboe and CBOT as well as the New York Mercantile Exchange (NYMEX) and Chicago Mercantile Exchange (CME) all use open outcry in some capacity.

In these cases, though, there are also electronic alternatives that customers can use. Today, the majority of trading volume is handled electronically instead of on trading floors.

Article Sources
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