How Does the Stock Market Trading Floor Work?

By: Tom Streissguth

The traditional stock exchange was a place to buy and sell company shares, through the services of a stockbroker and his minions: the traders who did the actual buying, selling and negotiating on the exchange floor. With the rise of computerized trading in the 1990s, floor trading began to lose currency. Although not completely obsolete, floor traders are now responsible for a diminishing share of market activity. That's not to say their jobs have become any easier or less stressful.

Working the Floor

A typical exchange floor trader works for a brokerage company that accepts clients' orders to buy and sell stocks. The trader brings the order to a post on the floor of the exchange where a particular stock is trading, then negotiates the share price and order size with another trader or a specialist who maintains a book of all open orders in that stock. Other traders might simply work for their own account, or for individuals or businesses that own seats on the exchange.

Private Floor Trading

By some estimates, computer programs now handle 80 percent of all trading on the New York Stock Exchange. Banks, financial services firms and electronic trading companies have their own floors, where traders work at individual stations. Abel Noser, for example, handles trading for large clients such as pension funds on its own private trading floor through seven equity traders, two program traders and two bond traders. Other exchanges have no trading floor at all. For example, the Nasdaq Stock Market is completely automated.

Automated Trading

Most stock trading is done through desktop stations and online brokerages, bypassing the traditional floor trading procedure completely. With computer programs, algorithmic trading has become a dominant mode of buying and selling on the stock exchange. These programs use instantly available information about recent trading volume and price direction in a stock to evaluate and execute trades automatically, without human intervention. Algorithmic trading can be profitable. But without the judgment and intuition of a trader who is present, it also can lead to very rapid, out-of-control price spikes -- up or down. This can make stock trading extremely risky for meagerly capitalized investors.

Open Outcry

On exchanges where floor trading still rules, the open-outcry system can appear noisy and chaotic to a visitor. In an open-outcry system, traders standing at their posts on the floor use hand signals and verbal shorthand to quickly negotiate buys and sells. A color-coded tunic or coat and a prominent alphanumeric identifier, usually worn as a badge, identify the individual trader and a particular specialty or firm. Hand signals represent buy/sell, price and size, plus expiration month for options or futures contracts. When important news breaks, traders break into a chorus of loud bids and dramatic gestures. Despite appearances, the intention is to keep the trading orderly and fair. A trade executed via open outcry is an ironclad contract between individuals and the firms they represent. Any violation of the contract can bring a reprimand and fines, as well as a damaged reputation on the floor.

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About the Author

Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.

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