Floor Trader (FT): Definition, Role & Strategies

A floor trader (FT) is an individual who conducts transactions on the exchange floor for his/her own account. 

Usually, a floor trader trades in derivativesDerivativesDerivatives are financial contracts whose value is linked to the value of an underlying asset. They are complex financial instruments that are or securities on the trading floor and seeks to make profits from price swings over the short term. A floor trader can be referred to as a listed competitive trader or a liquidity provider.

A floor trader is himself/herself an investor and makes independent decisions related to investments on his/her portfolio. Historically, a floor trader used to utilize the open outcry approach to match the buy and sell orders.

However, the open outcry system is gradually being replaced by the electronic trading system, which does not require interaction between people who seek to buy and sell stocks. The trader plays a significant role in reducing the spread between the bid and ask price and providing liquidity in the exchange market.

Summary

• A floor trader (FT) is an individual who conducts transactions on the stock exchange floor for his/her own account.
• Investors can trade in the exchange market in various ways – invest personally or invest through a trader or a floor broker.
• Floor traders are declining in numbers following the growing popularity of electronic trading among investors.

How to Become a Floor Trader

The stock exchange trading floor is extremely competitive and fast-paced; hence, one should have as much knowledge and experience as possible before actually trading and standing on the trading floor.

Before a floor trader can start trading on any exchange, he/she is required to pass a screening process. As per the requirement outlined by the National Futures Association (NFA)National Futures Association (NFA)The National Futures Association (NFA) is a self-regulatory organization that regulates the U.S. derivatives industry and provides investors with protection, every applicant must file the following:

1. A completed Form 8-R
2. Fingerprint cards
3. Proof that trading privileges have been granted to the individual obtained from an exchange
4. An $85 application fee (non-refundable)

Many exchanges may require additional screening criteria to be fulfilled. Moreover, certain regulations and rules need to be abided by if an applicant aims to become a floor trader.

Floor Trader vs. Floor Broker

Investors can trade in the exchange market in various ways – invest personally or invest through a trader or a floor broker. Both the floor trader and floor broker bid against other traders to get the best terms possible for every sale or purchase. However, a floor trader trades for his/her own account.

Due to time constraints, most investors are unable to closely monitor stock fluctuations and market movements. Such investors hire trading firms for the execution of their investments. The majority of trading firms employ floor brokers of their own who make investments according to the desires of their clients or investors. A floor trader is called a local, whereas a floor broker is referred to as a pit broker.

Future Outlook

The majority of traders in an exchange are not floor traders. With the advent of electronic trading, floor traders are becoming rare. Electronic trading is becoming cheaper and faster, therefore most exchanges no longer use trading floors.

However, many exchanges – such as the New York Stock Exchange (NYSE)New York Stock Exchange (NYSE)The New York Stock Exchange (NYSE) is the largest securities exchange in the world, hosting 82% of the S&P 500, as well as 70 of the biggest of the United States – still utilizes the open outcry technique for trading. The open outcry process involves verbal communications and the use of hand gestures for transferring information regarding buy/sell orders.

In the open outcry method, the traders are able to communicate trades with persons on the trading floor and get a better sense of demand and supply for the securities than trading electronically.

However, the future of floor trading remains uncertain, following the outbreak of the coronavirus pandemic. It led to the closure of trading floors of exchanges around the world starting in March 2020. Although trading floors are gradually opening in many exchanges, the future of a floor trader is uncertain.

More Resources

CFI offers the Capital Markets & Securities Analyst (CMSA)™Program Page - CMSAEnroll in CFI's CMSA® program and become a certified Capital Markets &Securities Analyst. Advance your career with our certification programs and courses. certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

• Six Essential Skills of a Master TraderSix Essential Skills of Master TradersJust about anyone can become a trader, but to be one of the master traders takes more than investment capital and a three-piece suit. Keep in mind: there is a sea of individuals looking to join the ranks of master traders and bring home the kind of money that goes with that title.
• Order BookOrder BookAn order book is a list of orders that presents different offers from buyers and sellers for a specific security. It shows the prices and volumes
• Bid and AskBid and AskThe term bid and ask refers to the best potential price that buyers and sellers in the marketplace are willing to transact at.
• Trade Order TimingTrade Order Timing - TradingTrade order timing refers to the shelf-life of a specific trade order. The most common types of trade order timing are market orders, GTC orders,