What is a Floor Trader (FT)?
A floor trader (FT) is an individual who conducts transactions on the exchange floor for his/her own account. The trader should abide by the same rules of trading that are followed by exchange specialists who trade as representatives to others.
Usually, a floor trader trades in derivatives 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. Traditionally, a floor trade 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.
- 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 number nowadays, 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 gain experience as much as possible through actual 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), every applicant must file the following:
- A completed Form 8-R
- Fingerprint cards
- Proof that trading privileges have been granted to the individual obtained from an exchange
- 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.
For a lack of time, some 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.
The majority of traders trading in an exchange are not floor traders. With many traders investing personally switching to the electronic form of trading, floor traders are becoming rare. As electronic trading is becoming cheaper and faster, most exchanges no longer use trading floors.
However, many exchanges – such as the New York Stock Exchange (NYSE) of the United States – still uses 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 read the persons on the trading floor and the outcomes with a significantly lower rate of errors compared to computers that are unable to pick verbal signals.
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 still not assured.
CFI offers the Capital Markets & Securities Analyst (CMSA)™ 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: