Page 144 - DCOM510_FINANCIAL_DERIVATIVES

Unit 9: Trading Futures and Option

“Local” Traders Notes
Perhaps the most visible and colourful speculator is the professional floor trader, or local,
trading for his own account on the floor of an exchange. Locals come from all walks of life and
frequently began their careers as runners, clerks or assistants to other traders and brokers.
Locals are usually more interested in the market activity in the trading pit as opposed to the
market activity in the underlying market fundamentals. With the popularity of electronic trading
sweeping the industry, a trader who operates in a fashion similar to a floor local has emerged—
the “electronic local.”

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Caution The electronic local trades using the same method as the local except they do so
through the Internet and a computer rather than in the trading pits of Chicago.

Proprietary Traders
Another major category of trader is the proprietary trader, who works off the floor for a professional
trading firm. These “upstairs” traders are employees of large investment firms, commercial banks
and trading houses typically located in major financial centres. This group has a number of different
trading objectives. Some engage in speculative trading activity, profiting when the market moves
in their direction. Such proprietary traders are compensated according to the profits they generate.
Other proprietary traders manage risk, hedging or spreading between different markets—both
cash and futures—in order to insulate their business from the risk of price fluctuation or exploiting
differences and momentary inefficiencies in market-to-market pricing.

Market Makers
Market makers give liquidity to the market, constantly providing both a bid (expression to buy)
and an offer (expression to sell). Increasingly important in electronic markets, market makers
ensure that traders of all kinds can buy and sell whenever they want. Market makers often profit
from the “spread,” or the small difference between the bid and offer (or ask) prices.
9.1.3 How Trader’s Trade

Each of the types of traders previously described uses a different strategy to achieve his goals.

Scalpers
A scalper trades in and out of the market many times during the day, hoping to make a small
profit on a heavy volume of trades. Scalpers attempt to buy at the bid price and sell at the ask
price, offsetting their trades within seconds of making the original trade (see figure 9.1).

Figure 9.1: Scalp in Stock Trading
Sell

Buy Buy
Sell

Sell Buy Sell Sell
Buy Buy

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