Despite its allure – some would say romance – floor trading is a fading game. As it becomes increasingly electronic and the flow of open outcry orders shrinks, those who remain on the floor need to rethink their game plan if they want to succeed “upstairs.”
While activity continues on exchange trading floors, the number of people actually working on them has dwindled dramatically. Even those who remain admit the vast preponderance of their trading is now done electronically or, as they refer to it, “upstairs.”
According to a former floor trader who has worked on the floors of both the Chicago Mercantile Exchange and American Stock Exchange, the doomsday predictions for the floors date back to the 1980s. Now a partner in a New York arbitrage firm, he observes, “Traders just happen to be a very pessimistic group of people when it comes to their livelihood, and I think it comes from the fact we often move on the inefficiencies of the market.”
“Of course, open outcry trading will eventually die,” he says. “But it’s really hard to say exactly when that will happen.”
To stay relevant, floor traders should become well versed in the IT side of the field, mastering spreadsheets and the tools needed to handle technical analysis. “You have to be someone with strong investigative tendencies to succeed in this business – a much more opinionated trader,” believes this former trader. “You have to be able to see opportunities and correlations between differing products, from heavily and thinly traded ones”
Electronic traders also must be able to deal with the idea of taking more risk, he says. “Previously, when the bell rang you knew who was in the pit with you, and you knew the crowd. Now, you have to be able to investigate the market and use the necessary technology out there to make it.”
The Right Spirit
Floor traders “with an entrepreneurial spirit will be the ones who have the best luck at electronic trading,” says Larry Levin, a floor trader on the Chicago Mercantile Exchange and president of Secrets of Traders, a Chicago-based company that educates commodities traders. For those who want to get off the trading floor entirely, Levin believes computer arbitrage has great promise.
Levin believes the beauty of electronic trading is that it can be done from anywhere in the world. The more savvy trading firms have already shifted gears by offering tools and technologies that allow their floor traders to place orders electronically, he notes.