Trading floor
Trading desk
A dealing room refers to a literal floor in a building where traders in stocks, fixed income, futures, options, commodities or currencies buy and sell securities. Traders buy and sell securities on behalf of clients or on behalf of the financial company that employs them. The trading floor of a stock exchange is commonly referred to as “the pit” because the trading areas for different stocks are generally designed as roughly circular areas that traders descend into to engage in trading.
How is Trading Done on a Trading Floor?
Sales and Trading experts on a buying and selling ground use the “open outcry” approach of buying and selling. The open outcry approach stands in stark comparison to the electronic, online buying and selling strategies utilized by current exchanges.
Open outcry buying and selling take region as follows:
Bidding and offering
Under the open outcry approach, investors speak buying and selling facts via way of means:
- Shouting verbal gives and bids
- Waving hands to convey interest to their gives and bids
- Using hand signals
The float of hobbies in buying and selling pits is regularly pretty volatile. A trading hobby is maximum near the outlet and last of buying and selling, or while crucial facts are launched that impact the market, which includes the discharge of a key monetary report. A “runner” coming near the pit with a brokerage order is met via way of means of investors who begin shouting to get the eye of the ideal dealer even earlier than the order has been given to her/him.
Since the best agents on the pinnacle of the pit can see the runner, if the one’s agents all at once emerge as active, agents in addition down the stairs normally select out up on that truth and act accordingly. Traders in the middle of the pit may additionally spur hobby due to the fact they will be the primary ones to look at crucial alternate at the facts displays, which spurs them to movement and, accordingly, consequences in more hobbies in the course of the pit.
To cope with the volatility, well-known noise level, and common facts overload, a not unusual place method amongst ground investors is to attention to sure different investors and/or facts, and bargain the rest. For example, trader “A” from one organization might also additionally have expertise with trader “B” from every other organization that each time trader “A” is trying to promote stocks of a sure stock, trader “B” will normally be inclined to shop for them. Therefore, while trader “A” does need to promote stocks of that stock, in preference to shouting gives to all the investors within side the pit, he’s going to simply appear without delay to trader “B”, indicating the variety of stocks he desires to promote.
Creation of an informal contract
A contract is concluded when a trader announces that he wants to sell a good at a certain price and another trader replies that he will buy the good at the advertised price. Although these contracts are informal, it is essential for the integrity of the trade into which traders enter. If, for example, a trader at the end of the day reneged on a deal he made in the pit to buy a big batch of Treasuries, that one-off event could theoretically trigger a disruption in the entire bond market.
Record the transaction
Because the traders involved in a trade may be within 20 to 30 feet of each other when a trade is completed, the buying merchant and the selling merchant record the transaction separately.
Confirmation and acknowledgment of receipt of a transaction
Once the transaction has been confirmed by both parties, the clearing member of each operator declares their share of the transaction to the clearing house. The clearinghouse tries to match the two agreements; until then, each party assumes what is known as non-comparative risk. If the deals are successfully matched, both traders recognize each other’s claims over the other. However, if the clearinghouse does not comply with the agreements, an “exit transaction” is reported.
An outbound transaction occurs when there are:
Misunderstanding among affected merchants
Misreporting by employees, keystrokes and/or merchants
Resolving transactions can be costly, but they are almost always resolved correctly and promptly before the trading day. Until the transaction is accepted, traders have unfounded mutual claims i.e. transactions do not have a jointly written acknowledgment of the transaction. Therefore, many traders choose to trade with traders who have had a long-standing relationship with them and whom they feel they can trust.
Structure of a trading room
The trading room is a large room with several circular arenas called pits. The pits have a flat centre and wide steps that rise concentrically to the edge (the steps ensure traders can see each other). The exchanges take place in the stands. The traders stand in the centre of the pit, facing outwards, or on the steps, facing inwards.
The stands, assigned to brokerage firms, are located near the boxes and consist of electronic equipment (such as telephones). Stalls receive orders from customers or the company, and those orders are passed through the designated pit via a courier. Several devices display relevant information for trading on the trading floor
Type of trader in a dealing room
The trading room has the following types of traders:
Broker
A broker in the room negotiates on behalf of clients, according to the orders given by the latter. Since a plan broker works on behalf of his client, he does not have the same decision-making freedom as other professionals in the pit.
A floor broker can be:
An employee of a brokerage firm who processes orders for that firm
An independent professional who is employed by several brokers and receives a commission for his efforts.
Retail clients rarely communicate directly with plan brokers. Instead, account managers take their orders and pass them on to brokers. Active individual clients and large commercial clients may be in direct contact with their plan broker.
A scalper is an independent trader who looks for temporary imbalances in the normal order flow in the pit which he can profit from by buying and selling assets on his trading account. Scalpers reduce the downside risk by holding small positions. Scalpers provide “predictable immediacy” – liquidity and (sometimes) depth to the market as they allow other traders to complete their orders on time and at a price similar to the last price. Scalpers buy at the bid price and sell at the asking price.
Scalper
Position trader
A position trader takes a larger position than a scalper and holds the position longer. A longer position results in a lower turnover which, in turn, results in a higher risk. Therefore, position traders need to guarantee higher profit margins.
Position traders trade on the ground because:
This translates to cost savings as the position trader does not have to pay brokerage fees to other floor traders
Information may be more readily available ground than ground
Spreaders take opposing or compensatory positions in two or more commodities that are related to each other. They help to create interconnections between prices in different but related markets so that commercial pressures in one market affect prices in a related market. This increases the complexity of particular markets. In addition, the separation between inactive and active markets is increasing. dormant market liquidity.
The difference between different markets:
- Between different maturities of the same asset
- Between the underlying spot market and the corresponding futures market
- Between different types of futures markets
- Between options and same commodity futures
Spreader
Hedger
Hedgers are ground traders who represent a trading company. Hedging is the act of reducing risk by taking a position in one market that is opposite to a position in another market.
A specialist is the broker and dealer of a plan brokerage. Specialists were born when plan brokers started trading from specific trading positions. A specialist allows a plan broker to execute orders for assets traded in a specific remote location.
