At Chicago’s equity options market, ‘open outcry’ cranks up the volume (2024)

FAQs

What is the purpose of open outcry in the futures and options pits? ›

What Is Open Outcry? Open outcry was a popular method for communicating trade orders in trading pits before 2010. The verbal and hand signal communication used by traders at stock, option, and futures exchanges are now rarely employed, replaced by faster and more accurate electronic order systems.

The group confirmed on 5 May 2021 it would not re-open the open outcry trading pits following their closure in March 2020 during the COVID-19 pandemic, while contrastingly, Cboe opened a new trading floor in June 2022, having also closed due to COVID-19 related reasons in March 2020.

Open outcry is a method of communication between professionals on a stock exchange or futures exchange, typically on a trading floor. It involves shouting and the use of hand signals to transfer information primarily about buy and sell orders. The part of the trading floor where this takes place is called a pit.

It was a peculiar dance of financial communication. The late 20th century marked a pivotal moment in trading history as electronic trading platforms began to gain prominence. This transition from open outcry to electronic trading was a game-changer. The rowdy pits gradually gave way to the silent hum of computers.

This summer, CME GROUP closed open-outcry trading for nearly all of its futures markets in New York and Chicago.

Advantages of open outcry

The open outcry method makes it possible for traders to actually see each other and gain access to facial expressions that reveal a lot about the concerned parties. More specifically, traders look for emotions like greed and fear, something that cannot be seen in electronic trading.

Signals that occur with palms facing out and hands away from the body are an indication the gesturer wishes to sell. When traders face their palms in and hold their hands up, they are gesturing to buy. Numbers one through five are gestured on one hand with the fingers pointing directly upwards.

However, it can be a frustrating and costly experience for many new traders, leaving them with little to show for their efforts. Based on several brokers' studies, as many as 90% of traders are estimated to lose money in the markets.

Cases of insider trading often capture the attention of the media, particularly if the accused party is a public figure. Four cases that captured a significant amount of media coverage in the U.S. are the cases of Albert H. Wiggin, Ivan Boesky, R. Foster Winans, and Martha Stewart.

The sales per share metric is calculated by dividing a company's 12-month sales by the number of outstanding shares. A low P/S ratio in comparison to peers could suggest some undervaluation. A high P/S ratio would suggest overvaluation.

Why do Wall Street traders yell? ›

Due to the circular design of the stock market trading floor, it is commonly referred to as “the pit” and professional traders use the open outcry method to buy and sell securities through hand gestures and shouting bids or offers verbally.

Investors can, should they choose to do so, buy these shares, and then they can sell them on to other investors, if someone is willing to buy. In privately held companies and small obscure companies, this is quite common. In large publicly traded companies, it is possible, but would be an extremely rare occurrence.

Founded by the National Association of Securities Dealers, the NASDAQ began trading on February 8, 1971, as the world's first electronic stock market, trading for over 2,500 securities.

The Dutch East India Company (VOC) held its 'initial public offering' (IPO) in August 1602. It was the first of its kind in world history and therefore a key event in financial history, and the history of the capitalist world.

Key Takeaways

Few exchanges now have pit trading, moving from hand signals and verbal communication to automated systems. Floor trading allows for showmanship and to simplify large, complicated orders.

Open interest is the total number of futures contracts held by market participants at the end of the trading day. It is used as an indicator to determine market sentiment and the strength behind price trends.

A future is a contract to buy or sell an underlying stock or other assets at a pre-determined price on a specific date. On the other hand, options contract gives an opportunity to the investor the right but not the obligation to buy or sell the assets at a specific price on a specific date, known as the expiry date.

Hedging: Options on futures can be used to hedge risk, whether it be position/portfolio risk, or risk in a business operation. For example, a farmer who's worried about the price of wheat falling before harvest could buy a put option on wheat futures.

On May 4, 2021, CME Group announced it would permanently close most open outcry trading pits, while the Eurodollar Options pit would remain open for trading Eurodollar and SOFR options. All products continue to trade on CME Globex. Read more below and check this page for any additional relevant trading updates.