Floor trader

From CEOpedia | Management online

Floor trader - is a member of a stock exchange who usually makes his money on a price spread between a price of the bid and a price of the ask. This kind of trader purchases options, futures or shares at the lower price and sells them at the higher price with a profit for himself [1].

The essence of a floor trading

Floor traders earn their own money on the ask or bid spread. They are that kind of people who spend (in many situations) nearly amount thousands of dollars in every month for the benefit of being on the level of the floor of the exchange (thousands or hundreds to get a seat). These traders could rent the seats or purchase the seats, achieving a right to buy or sell as a member of the exchange. Also, they could spend all day generating liquidity for the not trading on exchange floor investors. Due to this activity, traders want to get a benefit in return. This benefit is the advantage of making money on the spread. The money connected with the spread is from the distinction between the offer and the bid price. Besides, being right where the work allows them to perceive the order flow. This flow od order in the purchasing and selling is appearing around them. They could recognize when big, important traders are participating. This does give them disadvantages[2]. These difficulties include the following five points [3] :

  • a need to constantly be in a market to cover costs;
  • high monthly expenses;
  • very mentally and physically demanding work;
  • misses chances in other markets;
  • getting caught up not in fact, but an emotion.

" Floor traders use a variation of this system " [4].

Training programs addressed to floor traders

Programs are created to provide floor traders with owned demanded knowledge and abilities to trade contracts. This is the main purpose. When there is no special institutional training requirement, it is a privilege to get a degree od A-levels. Everyone should know that floor trading is an exciting and always high-pressure job. There are days that this kind of job could be stressful. Sometimes, while trading terms will differ from exchange to exchange, there is a need to work long hours [5].

Example of training program done by The London International Financial Futures and Options Exchange [6]. " The program comprises a preliminary induction course and one month's experience on the floor before any candidate becomes eligible to register for the Floor Traders Course. The induction course comprises a basic introduction to London International Financial Futures and Option Exchange, its structure and systems. The Floor Traders Course is taken in two stages addressing, successively, theory and practice" [7].

Examples of Floor trader

  • A floor trader may work with stocks, futures, options, and other products. For example, a floor trader might purchase a call option for a particular stock at a lower price and then sell it at a higher price to make a profit.
  • Another example of a floor trader would be a trader who works with derivatives such as futures contracts. They might purchase a futures contract on a commodity at a lower price and then sell it at a higher price to make a profit.
  • A floor trader might also purchase and sell stocks directly, such as buying a large amount of shares of a particular company at the lower price and then selling them at a higher price.
  • Finally, a floor trader might be involved in arbitrage, which is the buying and selling of different securities in different markets to take advantage of price discrepancies. For example, a floor trader might buy a stock in one market and sell it in another market at a higher price to make a profit.

Advantages of Floor trader

Floor traders have several advantages that make them attractive to investors. These include:

  • Access to up-to-date market information and insights from other traders on the exchange floor. Floor traders have the advantage of being surrounded by other traders and can gain insights from them which can be very useful in making trading decisions.
  • The ability to take advantage of arbitrage opportunities. Floor traders can take advantage of the price difference between two markets and execute trades quickly to make a profit.
  • The ability to react quickly to market changes. Floor traders are able to quickly respond to any changes in the market, such as a sudden shift in prices or news, and make decisions based on this information.
  • Lower costs due to lower transaction fees. Typically, floor traders pay lower transaction fees than other investors, which can result in higher profits over the long term.

Limitations of Floor trader

A floor trader's profits are limited by a number of factors, including:

  • The amount of capital available for trading - the larger the capital, the larger the potential profits;
  • The speed of decision-making - floor traders must make their decisions quickly, as the markets are constantly changing;
  • The accuracy of the price quotes - floor traders must be able to accurately read and interpret the market data in order to make the right decisions;
  • The costs of trading - floor traders must pay for the costs of trading, such as commissions, fees, and taxes;
  • The volatility of the markets - when markets are volatile, floor traders must be prepared to take on more risk in order to make profits;
  • The liquidity of the markets - when markets are illiquid, floor traders may have difficulty finding buyers or sellers.

Other approaches related to Floor trader

In addition to being Floor traders, there are other approaches used in the stock market. These include:

  • Day Trading - This involves buying and selling stocks or options on the same day and closing out any positions before the market closes. Day traders often use technical analysis to identify trading opportunities and may use leverage to maximize their profits.
  • Swing Trading - Swing trading is a longer-term approach to stock trading that involves taking positions for several days or weeks at a time. Traders use technical indicators and fundamental analysis to identify trade opportunities and hold positions for a few days or weeks.
  • Position Trading - This involves taking longer-term positions in stocks or options, usually for several months or even years. Traders use a combination of fundamental and technical analysis to identify positions that have the potential for long-term gains.

In summary, Floor traders use a spread between the bid and ask prices to make money, but there are a variety of other approaches used in the stock market, including day trading, swing trading, and position trading.


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References

Footnotes

  1. ↑ Fontanills G. 2005 p.316
  2. ↑ Fontanills G. 2005 p.356
  3. ↑ Fontanills G. 2005 p.356
  4. ↑ Weintraub N. 1996 p.69
  5. ↑ Spence D. 1999 p.120
  6. ↑ Spence D. 1999 p.120
  7. ↑ Spence D. 1999 p.120

Author: Aleksandra Zegiel

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