Trading Floor Definition

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Trading Floor Definition

What Is a Trading Floor?

A trading floor is a physical location where financial products such as shares, fixed income, futures, and options are traded.

Trading floors may be found in exchange facilities such as the New York Stock Exchange (NYSE) and the Chicago Board of Trade (CBOT).Trading floors may also exist as the focal point of trading activity inside a financial institution, such as an investment bank or hedge fund.

Key Takeaways

  • A trading floor is a physical space where securities trading and other associated activities occur.
  • Trading floors may be found at securities exchanges (e.g., the NYSE) or as trading hubs inside financial organizations’ offices.
  • Prior to the introduction of computerized trading, the dominant trading technique on trading floors was open-outcry.
  • Trading floors still exist today, although their breadth and capacity are reduced due to the replacement of displays and algorithmic trading.

Understanding Trading Floors

A trading floor is made up of pits on an exchange. This was due to the fact that the trading floor was roughly circular, with stairs recessed into the floor from which traders had to walk into the arena to perform their trades. When you consider the chaotic, feverish character of this sort of action, the term seems pretty fitting.

On trading floors, many different sorts of traders may be found. The most popular are floor brokers, who are responsible for trading on behalf of customers. Hedgers, scalpers, spreaders, and position traders are some of the other sorts of traders.

Brokerages, investment banks, and other trading organizations may also have their own trading floors. The trading floor in these circumstances refers to the actual office site that contains the trading division, which may execute transactions through the internet or phone.

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Many of the trading floors that formerly dominated market exchanges have vanished with the development of electronic trading platforms, as trade has become increasingly electronically based.

NYSE Trading Floor

The NYSE trading floor is situated at 11 Wall Street in New York City, where it has been since 1865. In 1878, the exchange added telephones, giving investors immediate access to traders on the NYSE trading floor. Today, the majority of transactions on the trading floor are automated and completed in less than a second. On the trading floor, a bell is rung to indicate the start and end of each day’s trading.

In an age when trading floors are becoming obsolete, the NYSE announced in 2017 that it will enable all US stocks and exchange-traded funds to trade on its trading floor, boosting the number of securities that may be traded on the trading floor from around 3,500 to over 8,600. This addition was finished in the first part of 2018.

Trading Floors and the Open Outcry Method

Prior to the introduction of computerized trading, the dominant trading technique on trading floors was open outcry. The system employs verbal and hand signal communications to transmit information such as the name of a stock, the amount of shares the broker wishes to trade, and the desired price.

A broker, for example, could raise their hand if they want to boost their offer. Open outcry trades constitute a contract between persons on the trading floor and the brokerages and investors they represent.

The U.S. Securities and Exchange Commission (SEC) approved BOX Options Exchange (BOX), also situated in Chicago, to conduct open outcry trading on its trading floor in 2017, marking a victory for this trading style. Cboe Global Markets (Cboe) operates an electronic as well as a conventional open air trading floor and plans to expand its Chicago site in mid-2022.

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The Death of the Trading Floor

While trading floors remain iconic in the world of securities trading, they have mostly been superseded by computer displays, electronic markets, and algorithmic trading.

In 1967, Instinet was the first significant electronic alternative to the trade floor. Clients (institutions only) might use Instinet to avoid trading floors and conduct discreet transactions. Instinet was a gradual growth, not truly taking off until the 1980s, but it has emerged as a prominent player alongside companies like as Bloomberg and Archipelago (acquired by the NYSE in 2006).

Nasdaq was founded in 1971, but it was not initially an electronic trading system; it was primarily an automated quote system that enabled broker-dealers to check what prices other businesses were offering (and trades were then handled over the phone).Nasdaq eventually introduced additional services, such as automated trading systems. Following the 1987 meltdown, when some market makers refused to pick up their phones, the Small Order Execution System, which allowed electronic order input, was introduced.

Other systems quickly followed. CME’s Globex started in 1992, Eurex in 1998, and many other exchanges implemented their own electronic systems.

Given the advantages of electronic systems and the customers’ desire for them, a significant portion of the world’s exchanges have shifted to this manner. The London Stock Exchange was one of the first major exchanges to convert, doing so in 1986. The Borsa Italiana followed in 1994, the Toronto Stock Exchange followed in 1997, and the Tokyo Stock Exchange followed in 1999. Many major futures and options markets have also made the transition.

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Today, the United States is almost alone in preserving some sort of open outcry exchanges. Open outcry is used in some extent by major commodities and options exchanges such as Cboe and CBOT, as well as the New York Mercantile Exchange (NYMEX) and Chicago Mercantile Exchange (CME).

Customers may, however, adopt electronic substitutes in certain situations. The bulk of trade volume is now handled electronically rather than on trading floors.

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