What is a Local Trader?

Mary McMahon

A local trader is a person who participates in financial markets with the goal of buying and selling securities on her own account, rather than acting as a representative for investors. A number of terms are used to refer to local traders including registered trader, competitive trader, and floor trader. These traders help to maintain liquidity in financial markets, although they contribute a relatively small percentage of overall trades, with the bulk of trades involving institutional investors working at very high volume.

Man climbing a rope
Man climbing a rope

In some markets, regulations govern the activities of local traders. Many require that 75% of their trades be stabilizing in nature, meaning that they must sell securities when prices are trending up and buy when prices are trending low. In some cases, a local trader may act as a dual trader, both representing himself and executing trades on behalf of other people. Concerns about conflicts of interest in dual trading usually lead regulators to track the activities of such traders closely, monitoring them for signs of illegal or questionable activity.

With the advent of electronic trading, being a local trader has become very easy. People can log on directly to trading systems to buy and sell securities without a broker as an intermediary. In markets where open outcry trading is still practiced on the trading floor, people can also enter and trade directly, after meeting requirements set by the exchange. It is usually necessary to buy a seat at the exchange in order to trade, and people may need to pass a certification exam to be allowed on the floor as a local trader.

Risks for local traders can be considerable if they are not familiar with the market or do not do their research well. While their losses are limited by the small size of their transactions, a bad trade can still bankrupt an individual trader, even if the market as a whole is not affected. Local traders must keep track of multiple sources of information while working, and usually spend after hours time in analysis and research so they can trade more effectively when the markets are open.

No special educational requirements are involved for a local trader, and many people just have high school diplomas. It can be helpful to have experience with a trading firm before branching out independently, although this is not required. A firm understanding of markets along with the ability to think critically and analyze information with care is very useful, as are aggression and quick thinking.

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