What is a trading room?
A dealing room refers to a physical area in which trading activities in financial instruments, such as actions, fixed income, futures contractsand options, take place.
The trading floors are located in the buildings of various stock exchanges, such as the New York Stock Exchange (NYSE) and the Chicago Chamber of Commerce (CBOT). Trading rooms can also exist as a center of trading activity within a financial firm such as an investment bank or hedge fund.
Key points to remember
- A dealing room is a physical location where securities trading and related activities take place.
- Trading floors can be located at the sites of stock exchanges (eg, the NYSE) or as centers of commercial activity in the offices of financial companies.
- Outcry was the primary trading method used on trading floors before the rise of e-commerce.
- Today, trading rooms still exist but are limited in scope and capacity as they have been replaced by screens and algorithmic exchanges.
Understanding wooden floors
The trading floor is made up of pits on an exchange. Indeed, the trading floor was somewhat circular with steps embedded in the floor, where traders had to enter the arena to make their trades. Consider the hectic and frenetic nature that comes with this type of activity, and one can see that the moniker is quite descriptive.
Many different types of traders can be found on trading floors. The most common are the floor brokers, who are responsible for trading on behalf of clients. Other types of traders include hedgers, scalpersspreaders and position traders.
Brokerage houses, investment banks and other businesses involved in trading activities may also have their own trading floors. In these cases, the dealing room refers to the physical location of the office that houses the trading division, which may conduct transactions over the Internet or by telephone.
With the advent of electronic trading platforms, many of the trading floors that once dominated stock markets have disappeared as trading has become more electronic.
NYSE Trading Room
The NYSE trading floor is located at 11 Wall Street in New York City and has been in its current location since 1865. The exchange installed telephones in 1878, which allowed investors direct access to traders on the NYSE trading floor. Today, most trades that take place on the trading floor are automated and executed in less than a second. A bell rings on the trading floor to signal the opening and closing of trading each day.
At a time when trading floors are becoming a relic of the past, the NYSE announced in 2017 that it would clear all US stocks and exchange traded funds to trade on its trading floor, thereby increasing the number of securities that can be traded on the trading floor from approximately 3,500 to approximately 8,600. This extension was completed in the first half of 2018.
Parquet floors and the Open Outcry method
The outcry was the main trading method used on trading floors before the rise of e-commerce. The method uses verbal and manual communications to convey information, such as the name of a stock, the quantity the broker wishes to trade, and the desired price.
For example, a broker may raise their hand if they want to raise their bid. Trades executed using the open-outcry method form a contract between the individuals on the trading floor and the brokerage houses and investors they represent.
In 2017, the United States Securities and Exchange Commission (SEC) gave his approval for BOX Options Exchange (BOX)also based in Chicago, to conduct outcry trading on their trading floor, a win for this method of trading. Cboe Global Markets (Cboe) uses both an electronic and traditional open-cry trading floor and expands its Chicago location in mid-2022.
The death of the trading room
Although trading floors are paradigmatic of securities trading, they have largely been replaced by computer screens, electronic markets and algorithmic trading.
Instantaneous was the first major electronic alternative to the trading floor, arriving in 1967. With Instinet, clients (institutions only) could bypass prosecutors’ offices and deal with each other confidentially. Instinet grew slowly, not really taking off until the 1980s, but became a big player alongside companies like Bloomberg and Archipelago (acquired by the NYSE in 2006).
Nasdaq started in 1971, but didn’t really start out as an e-commerce system; it was essentially an automated quoting system that allowed brokers to see prices offered by other companies (and trades were then processed over the phone). Eventually the Nasdaq added other features such as automated trading systems. Following the crash of 1987, when some market makers refused to pick up their phones, the Small order fulfillment system was launched, enabling electronic order entry.
Other systems followed. CME Globex released in 1992, EUREX debuted in 1998 and many other exchanges have adopted their own electronic systems.
Given the advantages of electronic systems and the preference of customers for them, a very large percentage of world trade has converted to this method. The London Stock Exchangewas among the first major exchanges to change, making the conversion in 1986. The Italian scholarship followed in 1994, the Toronto Stock Exchange changed in 1997 and the Tokyo Stock Exchange moved to fully electronic trading in 1999. Along the way, many major futures and options exchanges have also made the switch.
Today, the United States is more or less the only one to maintain a semblance of auction trading. Major commodity and options exchanges such as cboe and CBOT as well as the New York Commodity Exchange (NYMEX) and Chicago Mercantile Exchange (CME) all use open outcry to some degree.
In these cases, however, there are also electronic alternatives that customers can use. Today, the majority of trading volume is handled electronically rather than on trading floors.