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Floor Trader (FT)



Definition

A Floor Trader (FT) is a member of a stock or commodities exchange who trades on the floor of that exchange for their own account. The FT uses their own money to buy and sell securities or commodities, rather than trading on behalf of clients. The profits or losses gained from these trades are solely for the Floor Trader.

Phonetic

The phonetic pronunciation for “Floor Trader (FT)” is: Floor – /flɔːr/ Trader – /ˈtreɪdər/ FT – /ef tiː/

Key Takeaways

  1. Role: A Floor Trader’s primary job is to fulfill transactions on a securities market’s physical exchange floor on behalf of clients. They are skilled professionals who specialize in buying and selling securities such as stocks and bonds.
  2. Processing Orders: Floor Traders operate in what is sometimes referred to as ‘open outcry’. This live auction format involves delivery of purchase and sell orders by hand signals and by shouting, with an emphasis on speed and accuracy.
  3. Regulations: Floor Traders are heavily regulated by the Financial Industry Regulatory Authority (FINRA). They operate under a strict set of rules to maintain fairness and transparency in the trading process, in order to protect both themselves and their clients in the marketplace.

Importance

A Floor Trader (FT) is a crucial role in the financial sector, primarily in the stock and commodity exchanges. They are the individuals who execute transactions on the floor of the exchange for their accounts. The primary importance comes from their function in ensuring liquidity in the markets. By buying and selling securities, FTs help to reduce price volatility, tighten the bid-ask spread, and aid in the smooth functioning of the markets. Moreover, as they trade for their account, they also play a key role in determining the course of pricing trends based on their analysis and market movements. Thus, Floor Traders are a significant contributing actor to the vibrancy and operational efficiency of trading markets.

Explanation

Floor Traders (FTs) play a crucial role in financial markets, which is to maintain steady buying and selling activity and facilitate operational flow in the trading process. Their basic function is to execute trades on the floor of various exchanges such as those of commodities, futures, or securities. They are essentially market intermediaries who stand ready to buy or sell orders to promote liquidity, aid in price discovery, and ensure that trading can occur as seamlessly as possible. By doing so, they strive to smooth out price volatility and limit gaps in market prices. The presence of floor traders help market participants navigate better by narrowing down bid-ask spreads, which can contribute to creating a more efficient market.Additionally, floor traders play an important part in matching purchase and sale orders for their own accounts versus being the agent for an investor or client. Unlike floor brokers, who execute trades on behalf of clients, the floor traders trade on their accounts and take on a considerable amount of risk. However, this risk gets compensated by potential benefits they get if the market moves in their favor. They make their profits by leveraging the difference between purchase prices and sale prices. Thus, the practice of floor trading requires in-depth knowledge of the market, a high level of risk tolerance, and strong decision-making abilities.

Examples

1. New York Stock Exchange (NYSE): The NYSE is one of the world’s largest exchange markets where floor traders are actively involved. Floor traders at the NYSE take on the responsibility to manage trades for their clients and themselves. They perform transactions and interpret signals on the trading floor to ensure smooth operation of the market.2. Chicago Mercantile Exchange (CME): Floor traders at CME facilitate trading of futures contracts and commodity investments. This includes everything from agriculture, energy, and metals to interest rates, currencies, and stock indices. These traders handle immense volume of trades daily, leveraging market movements to earn profits.3. The Foreign Exchange Market (FOREX): Although most of trading in FOREX is done electronically, there are some select areas where floor traders still exist. These floor traders deal in currencies of various countries, and their responsibilities include managing huge transactions, interpreting market trends, and ensuring seamless trading processes.

Frequently Asked Questions(FAQ)

What is a Floor Trader (FT)?

A Floor Trader (FT) is a member of a stock or commodities exchange who trades on behalf of their own account. The Floor Trader must abide by specific guidelines stipulated by the exchange.

What is the primary role of a Floor Trader?

The primary role of a Floor Trader is to make trades on the exchange floor on their personal account’s behalf, not for a firm or clients. They buy and sell securities or commodities while trying to profit from the bid-ask spread.

Are Floor Traders and Floor Brokers the same?

No, Floor Traders and Floor Brokers are not the same. While both operate on the exchange floor, Floor Brokers execute trades on behalf of their clients or the firm they work for, while Floor Traders trade for their own personal account.

How does a Floor Trader make a profit?

A Floor Trader makes a profit by taking advantage of the bid-ask spread, which is the difference between the price offered for an asset (the ‘bid’ price) and the asking price for that asset.

How do Floor Traders conduct their trade?

Floor Traders conduct trades by using hand signals and shouting in the trading pit of a stock or commodity exchange. However, with the advent of electronic trading, many Floor Traders now use electronic platforms.

Do Floor Traders need any special qualifications or approvals?

Yes, to become a Floor Trader, one must pass specific examinations and get approval from the exchange’s regulatory body. They also need a significant amount of trading capital as they are trading with their own money.

Is Floor Trading still a common practice?

The practice of Floor Trading has considerably declined with the rise of electronic trading systems. However, it is still used in some exchanges worldwide.

Can a Floor Trader act as a market maker?

Yes, a Floor Trader often acts as a market maker. They provide liquidity to the market by being willing to buy and sell securities or commodities.

Related Finance Terms

Sources for More Information


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