- Where It All Happens
- The Auction Market
- Types of Floor Traders
- Order Flow from Customer to Pit
- Trading Floor Conclusion
This chapter is from the book
This chapter is from the book
This chapter is from the book
Types of Floor Traders
Exchange members can be broken down into several main categories, as the men and women who trade on the floor of the world's futures exchanges perform a variety of different functions. These different types of floor traders will be covered in the following sections.
Floor Brokers
Probably the most important person on the floor to readers of this book is the floor broker. Floor brokers are in the business of filling outside orders for different firms such as commission houses (like your broker), commercial interests, financial institutions, portfolio managers, processors and exporters, and the general speculating public. For each contract that the floor broker trades (buys or sells) he/she generally receives $1.00. Floor brokers generally cannot trade for their own accounts, and strictly fulfill the orders in which they are handed. The floor brokers on the U.S. futures exchanges work very hard to get the best price for their customers in the fastest amount of time. They have to pay attention to all of the bids and offers, working hard to make sure that all of their orders are filled at the best possible price in the shortest amount of time. With most pits having in excess of 50 people shouting bids and offers in them, this can be a daunting task.
Locals
Another group of traders, known as "locals," trade for their own accounts or the account of their firm. These are the speculators who generally post bids and offers in the auction market. A bid is the highest price the trading pit is willing to pay while the offer or ask is the lowest price the pit is willing to sell at. For example, assume that March Corn is $2.15 bid and $2.151/2 offer. This means that currently the traders on the floor of the Chicago Board of Trade are willing to buy March Corn at $2.15 per bushel—or they are $2.15 bid.
There are generally three types of locals:
Day traders
Position traders
Scalpers
Day traders normally buy or sell several times during the day, hoping to buy ahead of rising prices and sell ahead of falling prices. They generally hold positions for several minutes to several hours. Day Traders usually risk their own money, though day traders on the floor of the major exchanges manage some commodity funds. These traders are called day traders because they usually offset all of their positions at the end of each day, going home without any futures contracts, or "flat" as it is known on the floor.
Position traders tend to hold positions for days or weeks. They are called position traders because they tend to hold positions (either long or short) overnight, taking positions home with them. Position traders range from locals trading for their own accounts, to those actively hedging positions for their firms, to large institutions speculating on the future direction of prices.
The most essential cog in the pit is the scalper. Scalpers are ultra short-term traders who post bids and offers, always trying to buy the bid and sell the offer, "scalping" the difference. For example assume trader D is a scalper. He yells out a bid of 2151/2 and an offer of 216. "2151/2 bid ... 216 offer for 50" would be his battle cry. Assume that he managed to buy 50 at 2151/2 from trader Z at 9:35 CST. After buying 50 contracts of March Corn at 2151/2 he may then say "50 at 2153/4" undercutting the 216 offers in the pit. With trader X buying 50 at 2153/4, trader D was able to make $625 in less than a minute (2153/4 - 2151/2 = 1/4 cent ¥ 250,000 bushel (50 contracts of 5,000 bushels) = $625 before commissions and fees).
Because our scalper, trader D, is an exchange member, he pays commissions of roughly $0.20 per contract—membership has its privileges—so he would make roughly $605 in a very short amount of time by buying at the bid and selling at the offer and pocketing the difference of $12.50 per contract. After this trade is written up, and reported, trader D may bid 2153/4 on 20 and offer 20 at 2161/4 hoping to repeat the experience as many times as possible during the day. Essentially, a scalper strictly makes a market, with no directional bias, hoping to always buy the bid and sell the offer.
Because the scalpers are always willing to buy or sell, they ensure that the market is always two-sided—both a bid and an offer. The scalper hopes that because he/she has always bought the bid and is always selling the offer, that if prices go against them, they can get out of the trade at an equal price or a slight loss. For example, assume trader D, bids 2153/4 on 20 contracts and offers 20 at 216. If someone buys 20 from him at 216, trader D may turn around and bid 216 on 20 and offer 20 more at 2161/4. Being an active market-maker, trader D may be one of the first people to be able to buy at 216, getting out of the trade for profit or loss. However, if the market is rising, trader D may sell 20 more at 2161/4, giving him an average price of 2161/8. If he can buy 40 at 2161/4 then his losses would be $250 before commissions.
This process of buying the bid and selling the offer is repeated thousands of times each day, and hopefully at the end of the day the scalper has an average buying price less than his average selling price. In essence, by always making a two-sided market, with sufficient order in the pit, he can make a nice living just making the middle between the bid and offer.