Open Outcry Definition
Key Takeaways
- Open outcry is a trading approach wherein traders shout & use hand signals for stock, futures contract, or options exchange on a pit.
- It promotes an organized & well-planned approach for efficient matching of buyers & sellers in a dramatic trading environment.
- Since 2010, electronic trading has almost fully displaced the open outcry system except for New York Stock Exchange (NYSE) & London Metal Exchange (LME).
- While an open outcry system is a physical trading method, electronic trading employs computer software to place orders.
Open Outcry System Explained
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Open outcry is a conventional interaction technique used since the mid-1800s between traders to trade commodities, futures contracts, or stocks across the pit. Also, it is regarded as the most productive buyer-seller matching process that portrays the drama of the stock market.
One must have seen numerous pictures of traders shouting and screaming amidst a large commotion in the trading pits. The pits are sections of trading floors where the traders gather and communicate orders between them. Stockbrokers shout throughout the open outcry trading procedure to inform the number of stocks on sale with the stipulated cost. Also, they gesture to converse with each other easily amid the commotion.
A few typical hand cues incorporated
- Seller’s palm facing toward the buyer (to buy an offer)
- Buyer’s palm facing toward the seller (looking for a seller)
- Trader’s fist against the palm (STOP order), &
- Trader’s hand across the throat (order canceled or already filled)
- An ok signal with the hand( a put symbol)
- C signal with the hand (calling options)
Electronic trading gradually substituted this system due to better efficacy at lesser rates. However, it is still preferred for novice traders due to its distinct benefits. For instance, open outcry enables visual interaction & helps traders decipher emotions through facial expressions. Hence, it lets them make well-informed decisions based on a personal evaluation.
It promotes a custom trading experience with effective buyer-&-seller matching. In addition, the hue & cry in the pit is an accurate market volatility indicator. It also renders plenty of significant financial lingo & price specifications. In other words, open outcry trading manages to remain efficient & organized amidst a fast-paced haywire atmosphere. It also gives a wide number of traders to transfer information face-to-face with impressive transparency.
Though electronic trading is extensive & more efficient, the open outcry system has a 167-year-old successful trading history. This is because it has created vital market innovations to transform the futures markets into a crucial global economic aspect. Moreover, irrespective of the cut-throat competition, it helps develop a special bond among traders.
Electronic trading authorizes a handful of large market makers to widen the spreads, increasing the chances of complicity excessively. Nevertheless, open outcry permits any trader to enter the market & cash in on wide spreads, thus blocking collusion.
End of Open Outcry System
Electronic trading began superseding the open outcry systems in the late 1980s. This shift gained prominence after Deutsche Terminborse (Eurex’s predecessor) built a fully electronic exchange in the late 1980s.
A 1988 Chicago Tribune newspaper report mentions the foray of computers into trading at an incredible pace. This report also states that Chicago’s exchanges might be the only open outcry system left after the entry of virtual trading in almost every stock exchange market. In fact, by the end of the 80s, computers had already started substituting thousands of phone clerks, runners, keypunchers, & trade-checkers, & other personnel at the stock exchanges. Moreover, the future predicted in the previous snippet became a reality in the upcoming years.
Timeline of electronic trading conversion
- 1986 – London Stock Exchange (LSE)
- June 7, 1996 – Johannesburg Stock Exchange (JSE)
- 1997 – Columbo Stock Exchange (CSE), Toronto Stock Exchange (TSE), & Korea Exchange (KRX)
- April 7, 2005 – International Petroleum Exchange (IPE)
- 2008 – Minneapolis Grain Exchange (MGEX) & New York Mercantile Exchange (Nymex)
The famous Chicago-based futures exchange operator, Chicago Mercantile Exchange (CME), permanently shut down its open outcry system on May 5, 2021. It happened after a prolonged closure since March 2020 due to COVID-19.
However, the Eurodollar options pit will stay open to trade contracts in both open outcry & electronic venues. Hence, NYSE (New York Stock Exchange) & LME (London Metal Exchange) is currently the only exchanges with an open outcry system.
Open Outcry vs. Electronic Trading
Here is a comparison between open outcry and electronic trading system:
| Particulars | Open outcry | Electronic trading |
| Definition | Physical trading in a pit for stock exchanges & futures contracts | Computer software used to place online buy or sell orders |
| Founded in | 1800s | Late 1980s |
| Trading approach | Physical | Virtual |
| Current status | Inactive (Except New York Stock Exchange & London Metal Exchange) | Active |
| Access to marketplace | Unlimited access | Limited access |
| Transparency | Relatively more | Relatively less |
| Advantages | More methodical | Easy market accessibility |
| Augmented market volatility | More efficient | |
| Market fragility | Reduced prices | |
| Lack of transparency | Tighter bid/ask spreads | |
| No futures, stock, or forex market manipulation | Diversification of tradable assets | |
| Time-efficient | No | Yes |
| Documented trading data | Difficult to upkeep | Easier to upkeep |
| Liquidity | Comparably more | Comparably less |
| Unfair practices | Relatively less | Relatively more |
| Related stock exchanges | NYSE | London Stock Exchange |
| LME | Johannesburg Stock Exchange Columbo Stock Exchange | |
| Toronto Stock Exchange | ||
| Korea Exchange | ||
| International Petroleum Exchange | ||
| Minneapolis Grain Exchange | ||
| New York Mercantile Exchange | ||
| Chicago Mercantile Exchange |
Frequently Asked Questions (FAQs)
Yes, open outcry still exists in the New York Stock Exchange (NYSE) & London Metal Exchange (LME).
An open outcry system is a physical trading mechanism to communicate the trade orders through verbal & non-verbal signs. It helps facilitate an effective matching of offers & bids. However, the method is rarely available across the stock exchanges as electronic trading has almost fully replaced it since 2010.
Floor traders still exist due to their showmanship & the potential to simplify even the most complicated trading orders. In addition, it ensures better matching as compared to electronic trading.
The open outcry system enables visual communication among traders to read each other’s minds through facial expressions & body movements. Also, the constant commotion is a precise signal of market volatility.
Recommended Articles
This has been a Guide to Open Outcry and its Definition. Here we explain its timeline, how hand signals were used and its end along with its differences from electronic trading. You may also have a look at the following articles to learn more –
- Eurex Exchange
- Auction Market
- Reverse Auction
This post first appeared on Free Investment Banking Tutorials |WallStreetMojo, please read the originial post: here
