What and why do stock market traders shout at each other on the trade floor?

Question

When watching business or economics news, you may often see that people who work on the trade floor often appear to be shouting at each other and srambling with figures etc. Does anybody actually know what these people are doing to earn their money? Do they earn commission? Are they looking after shares of companies? Is this what investment banking is all about? Does it affect exchange rates? Blah blah blah. Essentially, what are they saying to each other?

Answer 1

Outside the US very little shouting goes on these days. Traders standing in a pit yelling have been replaced by computers. It is faster, more efficient and cheaper not to use real people. The film you see on the business news is either from the very small exchanges that haven't automated yet or six year old film taken when Liffe (the London futures market) still had a trading floor. The big exchanges in the US still have traders shouting at each other, but they're slowly moving the business onto computers as well. In three or four years those highly paid traders will be driving taxis or opening a shop.

The people you see on the news are buying and selling assets. They might be trading stocks, oil, gold, copper, derivatives, exchange rates, bonds, etc, etc. The basic principle is the same. All the shouting is pretty pointless, they do that to try to gain attention and intimidate the other traders. There is a system of hand signals used to indicate what they're doing (broadly pushing the hand away indicates selling, pulling it to you indicates buying). They are trying to agree a trade with one of the other traders in the pit and then pass it on to one of the Exchange staff monitoring the fun so they can record it. At that point the trade becomes legally binding.

Some traders have their own accounts and decide for themselves what they want to trade. Most work for one of the big investment banks. Orders are phoned in to one of the administrative assistants who then pass them on to a trader. Traders are paid a basic salary, with a performance bonus that can be several times their salary if they do well.

Answer 2

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Answer 3

You're actually talking about commodities and futures trading pits. The New York Stock Exchange does have floor traders, but they don't use hand signals. The hand signals were developed as a method to communicate amidst the noise of the pit. Only one commodity trades in a particular pit location, so the hand signals simply indicate whether the trader is a buyer or seller, how much they're looking to trade, and what price they would like to trade at. The Eddie Murphy/Dan Akroyd movie "Trading Places" has a scene at the end that actually does a really good job explaining it all.

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Answer 5

What you see is the "Open Outcry" system of trading. It's where floor brokers or pit traders stand in the pit and yell out buy or sell orders. For instance, if your trading futures contracts, and you send in an order to buy (1) Dec '06 wheat at $3.00 or better, the ticket is printed up by your broker and sent to via runner to the brokerage houses floor broker/trader. He will yell out the necessary wording to signify that there is an order for buying 1 Dec' 06 wheat at $3.00 or better. He has to yell it out because it's noisy and the others have to hear. If there is another order for selling Dec' 06 wheat at the price stipulated, the counter-party broker will signify as such and a trade has been made. The floor broker then write down the trade at the price executed and sends it via runner to the brokerage houses floor trading desk where it is input into the computer.

The people in the pit are not only floor traders for the various brokerage houses, but also pit traders. A pit trader is an individual like you or me that trades for their own account, but they bought a seat on the exchange thus allowing them to have access to the trading floor and trading directly in the pit instead of through a broker.

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Answer 7

You see this happen on the floor of auction markets like the NYSE, CBOT etc. They are buying and selling stock (or options or futures etc.) from each other.

NYSE - I'm an equities guy, so I'll use the NYSE as an example, it is probably different as to what exactly they're saying on the other exchanges, but the basic idea is the same on all the open outcry exchanges.
A typical buy order on the NYSE would sound like this "10.50 bid 100k XYZ" a counter would sound like this "100k at .60".
If the buyer accepts the couter he would say "I buy 100k XYZ 10.60" He could also counter the counter buy saying "10.55 for 100k", or repeat his 10.50 bid by saying "10.50 best 100k". What exactly is being said is not really important, just know that they are negotiating transactions on behalf of their customers.
This is trading, not investment banking. Investment banking is underwriting new or follow on issues, structuring M&A transactions and things like that. It does not affect exchange rates (unless you're trading currency futures I suppose). Floor brokers are typically paid a commission on a per share basis, its very small, fractions of a cent per share, so obviously the more you trade, the better you get paid.

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Answer 9

Well, imagine a room filled with several hundred people. Even if everyone speaks in a hushed voice, the noise level is bound to be substantial. Hence, you have to scream to be heard... What do floor brokers do? Depends. Some execute clients' orders, others are simply there to do short-term speculation with their own money or their clients' money. What are they screaming? Transaction details: securities to be bought and sold, quantities, and prices. Does it affect exchange rates? Barely; currencies are not traded on the same exchanges that stocks do.

As to investment banking, it has relatively little (sometimes nothing at all) to do with trading on the exchange floor:

http://en.wikipedia.org/wiki/Investment_banking

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