Floor Traders: Definition, Role, and Challenges in Modern Finance

A floor trader is an exchange member who executes transactions from the floor of the exchange, exclusively for their own account. Traditionally, they operated using the open outcry method in the pit of a commodity or stock exchange. However, with the advancement of technology, most floor traders now utilize electronic trading systems and no longer appear in the pit.

Floor traders serve a crucial role in commodity and stock markets, providing liquidity and narrowing bid-ask spreads. They are also known as individual liquidity providers or registered competitive traders.

Floor traders are often depicted in movies when scenes of securities exchanges are shown. These traders are shown as emotionally invested in their trades since they use their own capital. In reality, floor traders are increasingly rare due to the shift to electronic trading, which is conducted outside the pit.

Before becoming a floor trader, individuals must pass a screening process set by the exchange. For instance, the National Futures Association requires applicants to submit Form 8-R online, fingerprint cards, proof of trading privileges from a contract market, and pay a non-refundable application fee of $85. Other exchanges have their own screening requirements.

Floor traders, market makers, and brokers all work within the exchange environment, but they have distinct roles. Brokers act on behalf of clients, market makers primarily provide liquidity, and floor traders seek to profit with their own capital. However, all parties aim to achieve the best order execution possible.

Depending on the exchange’s rules, a floor broker may have permission to trade for their own account in addition to that of the firm or client they represent. In such cases, an individual can function as both a floor broker and a floor trader.

The prevalence of floor trading has waned as electronic trading has become faster and more cost-effective. Many exchanges have even closed their trading floors altogether. The uncertainty surrounding the future of floor trading was further intensified by the 2020 crisis.

The outbreak of the pandemic led to temporary closures of trading floors, including the New York Stock Exchange, starting in March 2020. While some exchanges have gradually resumed floor trading, the future of the floor trader as an occupation remains uncertain in the evolving financial landscape.

A floor trader is an exchange member who executes trades from the exchange floor for their own account, providing liquidity and contributing to market efficiency.

Floor traders, market makers, and brokers operate in the same exchange environment but have distinct roles. Brokers represent clients, market makers provide liquidity, and floor traders trade with their own capital.

The decline of floor trading is mainly attributed to the rise of electronic trading, which offers greater speed and cost-efficiency. Many exchanges have closed their trading floors as a result.

The future of floor trading remains uncertain. While some exchanges have resumed floor trading, the changing financial landscape and the impact of the 2020 crisis have cast doubt on the future of floor traders as a profession.