Want to know how many types of traders are on the trading floor of an exchange? Traders on a trading floor typically trade on behalf of their clients. They use different signals for the execution of a quick trade on the floor.
But before jumping on the types of traders on a floor, if you want to know about the trading floor, then visit – The structure and working on a trading floor on the exchange.
So, without wasting any more precious time of yours, let’s get onto the different types of floor traders and their functioning in a trading pit.
What are the Types of Traders on the Floor of the Exchange?
There are many traders that could easily be found on the floor of an exchange. So, the most common types of traders trade on the trading floor are the following:
➤ Floor Broker
➤ Position Trader
Let’s get into detail about the functioning of each type of trader one by one.
- Floor Broker: A floor broker is a person who carries out trade on behalf of the clients. As a floor broker works on behalf of the client, they don’t have as much independent decision making as other professionals in the pit.
Who can be a Floor Broker?A floor broker can be:
a. a salary base employee hired by a brokerage firm who works on the orders of the said firm
b. an independent professional who works for a multi brokerage firm and gets a commission for his/ her efforts.
Retail clients hardly directly contact floor brokers. Instead of employing one, they pass orders to the account executives who further convey this information to the floor brokers. Only large commercial clients or active individual clients may be in direct contact with the floor broker.
- Scalper: Scalpers are independent traders who look for something that goes out of order, in other words, temporary imbalances in the pit to make some profit out of it by the trading of assets from their own trading account. To reduce the downside risks, scalpers hold the position of a limited size. Scalpers also help in predicting liquidity and depths in the market by allowing other traders to finish their order in time and at a price similar to the last price. Scalpers purchase assets at the bid price and sell at the asking price.
- Position Trader: Position traders are those who purchase a larger position and holds the position for a longer period of time than a scalper does. Position traders need to make sure higher profit margins because holding positions for longer results in lower turnover, hence higher risk.
Then why position holder carries the trade? They carry trade on the trading floor because:
a. it is cost-saving as no need to pay brokerage fees to other floor traders
b. easy access to the information on the floor in relation to off the floor.
- Spreader: Spreaders take both positions i.e., opposing and offsetting in two or more interrelated commodities. This helps in interlinking between the prices in different but related markets. So, the pressure in one market affects prices in another related market. This also helps in increasing the liquidity of the inactive market by spreading between the inactive and the active market.
Spreading is generally carried out between the following different markets:
a. Future Markets
b. Options and Futures
c. Cash and Future Market
d. Different Maturities of the same assets
- Hedger: Hedgers are floor traders who work on behalf of a commercial firm. Hedgers do hedging which is an act of minimizing the risk by taking a position in the market that needs to be the opposite in another market.
- Specialists: Specialists are the floor’s brokers’ brokers and dealers. They came into being when floor traders start trading from specific locations only. Executing orders for traded assets at a specific remote location by a floor broker is all become possible due to specialists.