What Is Open Outcry?
Open outcry was a popular method for communicating trade orders in trading pits before 2010. The verbal and hand signal communicationused bytraders atstock, option, andfutures exchangesare now rarely employed, replaced by faster and more accurate electronic order systems. Signals and shouts made in a particular manner and sequence would convey trading information, intentions,and acceptance in the trading pits.
Key Takeaways
- Open outcry was the primary method for how pit traders communicated trade orders.
- The fierce competition in trading pits made things highly efficient, but electronic trading has proved to be even more efficient.
- Successful traders in open outcry relied on temporary information asymmetry in order to be successful, but more information parity helps retail and institutional traders alike to profit from greater trading efficiency and increased participation.
Understanding Open Outcry
Trading pitsare physical sections of trading floors, often with risers or uneven floor levels to accommodate eye contact with as many traders as possible, where trade orders are communicated face to face. Traders make a contractwhen one trader declaresthey want to sell at a certain price, and another trader responds that they will buy at that same price.
Open outcry is similar to an auction where all participants have a chance to compete for orders. It leads to transparency, efficient markets, and fair price discovery. Because trading can occur between any two participants at any given time, it differs from over-the-countertrading where trading is negotiated between two parties privately. Most of the trading in pits is conducted between one or more members in the crowd of the pit, and a smaller number of traders that stand at the edge of the pits as market makers. Most of the order flow will come through these market makers to the traders in the pits.
The length of the trading day differs between open outcry exchanges and those that use electronic trading such as theGlobex. Regular market hours typically run from 8:30 a.m. to 4:15 p.m. Eastern Standard Time. Open outcry sessions for some commodities such as corn futures and options (CBOT) run from 9:30 a.m. to 1:15 p.m.
First introduced in 1992, the Globex is thefirst global electronic trading system for futures and options. The Chicago Mercantile Exchange(CME) developed the Globex automated system. Electronic trading on Globex is available nearly 24 hours a day, from Sunday evening through late Friday afternoon. There is a short break each day between closing one day'strades and reopening the next day's trading. This break varies from 30 to 60 minutes, depending on the product oftrading.
The End of Open Outcry Trading
While open outcry dates back centuries as the dominant method for trading, most exchanges now use electronic trading systems. These automated systems reduce costs, improve trade execution speed, and create an environment less prone to manipulation. They also make it easier to aggregate information for all interested parties. Electronic trading is now available, often for free, on home computers and smartphones.
Some professional traders lament that electronic trading cannot capture the intangible information upon which pit traders relied. As an example, electronic trading is void of the subjective assessment of a buyer or seller's intentions or motivations. Electronics do not relay the mood of the trading pit, which some pit traders found very useful in making trades.
A feel for this pit dynamic is now only available in past movies and documentaries. Trading Places, starringEddie Murphy and Dan Aykroyd, provided a rather comical, though somewhat informative look into the methods, frustrations, and information asymmetry that traders experienced in the pits. It is still referenced by people experienced in the profession trying to describe what it used to be like.
Despite such pop culture references, the reality is that trading is far more efficient in current times than in days past, as evidenced by increased execution speeds and decreased trading fees. Thus it is unlikely that open outcry will ever return or grow as a method for traders operating at an exchange.
FAQs
Timeline of electronic trading conversion
The famous Chicago-based futures exchange operator, Chicago Mercantile Exchange (CME), permanently shut down its open outcry system on May 5, 2021.
How does open outcry system work? ›
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.
Which system replaced the open outcry trading system in 1995? ›
In 1995, BSE had replaced its open outcry system with the BSE on-line trading (BOLT) facility to facilitate smooth transactions. This totally automated, screen-based trading in securities was put into practice nation-wide within a record time of just 50 days.
What are the disadvantages of open outcry? ›
The main disadvantages are that traders are more susceptible to influence from individual traders, and that they will have less information available compared with traders working from a computer system. The hand gestures used in open outcry are somewhat similar to those used by bookmakers at racetracks.
Why do floor traders still exist? ›
Proponents of the trading pit say having people on the floor can help relay the message of the pit, and can help provide an assessment of a trader's intentions behind a buy or sell move. Trading face-to-face also helps simplify orders that are more complicated such as commodity futures or options trades.
What is the open outcry market? ›
Meaning of open outcry in English
a method of trading on a financial market in which people shout out their bids and offers, rather than trading using the phone or online: Dealers conduct their business via display screens linked to a central computer rather than by open outcry on a trading floor.
What time is open outcry trading? ›
Regular market hours typically run from 8:30 a.m. to 4:15 p.m. Eastern Standard Time. Open outcry sessions for some commodities such as corn futures and options (CBOT) run from 9:30 a.m. to 1:15 p.m. First introduced in 1992, the Globex is the first global electronic trading system for futures and options.
Is there still a trading floor in Chicago? ›
Founded in 1973 as the birthplace of listed options, Cboe Global Markets operates the largest options exchange in the U.S. In June 2022, Cboe unveiled its new trading floor in the historic Chicago Board of Trade building.
Can open outcry system be used for book building? ›
Can open outcry system be used for book building? No. As per SEBI, only electronically linked transparent facility is allowed to be used in case of book building.
Who controls the stock market? ›
The stock market is regulated by the U.S. Securities and Exchange Commission, and the SEC's mission is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation." Historically, stock trades likely took place in a physical marketplace.
July 1914: The start of World War I in Europe shuttered the exchange for four months, the longest closure on record. May 25, 1946: The NYSE shut down due to a railroad strike, part of one of the largest waves of strikes in US history.
How was the old trading system different than the modern trading system? ›
Trading began with the barter system. In those good old ancient days, goods were traded for goods in return. Eventually, trading of goods was replaced by the currency system and then the exchanges came about which transformed into automated or electronic systems with time.
What are the advantages of open outcry? ›
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.
What is the purpose of open outcry in the futures and options pits? ›
Open outcry is a trading method used in futures pits and stock exchanges where traders use verbal and nonverbal signals to communicate. Before the advent of electronic trading, nearly all financial trading was conducted via open outcry.
What are the disadvantages of been out of stock? ›
The most obvious consequence of stockouts is lost revenue. If a customer goes to place an order and the item is out of stock, you lose the profit of that sale. Shoppers may opt for cheaper products. Or even worse, you may lose a customer forever, which means less recurring sales in the future.
Are there still floor traders in Chicago? ›
There's still a trading floor at Cboe Global Markets, what used to be called the Chicago Board Options Exchange. Its business of listing options on stocks and equity indexes migrated to online networks years ago, but Cboe has found a need remains for the born-in-Chicago style of deal-making known as “open outcry.”
Are there any floor traders left? ›
Do floor traders still exist? Yes, floor traders still exist. While most have left the exchange floors to trade online, a few still trade on exchange floors. Nevertheless, since the 1980s and 1990s, phone and electronic trading have significantly replaced physical floor trading in most exchanges around the world.
Does the CBOE still have a trading floor? ›
Cboe's new space is home to around 120 trading booths and more than 330 kiosks where brokers and market makers can plug in their individual systems. Like NYSE, CBOE's floor also features a bell on a platform overlooking the trading floor that guests can ring at the start and close of the markets each day.
