Finance

Open Outcry System

Open Outcry System

The open outcry system also called pit trading is the system of trading that formed the basis for the exchange-based transaction that was traded in physical locations like a pit or other arenas. Although it may appear very chaotic, it’s the original way of matching traders and can be commonly seen in financial movies. It was popular before 2010 as a common trading method used for communication between professionals on a stock exchange or futures exchanges where traders used verbal and non-verbal signals to communicate with each other.

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Signals and shouts made in a particular way and sequences would convey trading information, intentions, and acceptance in the trading pits. A contract was made if a trader had a desire to sell at a certain price and another trader wished to buy it at the determined price. The open outcry method is rarely employed as it has been replaced with accurate and faster electronic systems. This system has been replaced by the electronic trading system which reduces fixed cost, improves speed, and also increases the efficiency of execution. Although this system has become old it is used for some specific transactions at key venues like the Chicago Mercantile Exchange, the Chicago Board Options Exchange, the New York Stock Exchange, and the New York Mercantile Exchange.

How does it work?

Open outcry is similar to an auction where everybody has a chance to compete for the orders. It leads to price discovery, efficient markets, and transparency. Most of the trading occurs between one or more traders in the pit and a small number of traders that stand at the edge of the pit as market makers. Most of the order flow will come from the market makers to the traders in the pit.

The length of the trading day differs between open outcry exchanges and those exchanges that use electronic trading like Globex. Globex is the first electronic trading system for futures and options that was first introduced in 1992 by the Chicago Mercantile Exchange. Regular market timings are from 8:30 am to 4:15 pm est. open outcry sessions for some commodities like corn futures and options are from 9:30 am to 1:15 pm.

Hand signals used:

Despite all the shouting and yelling certain hand signals are used by the traders-

  • Buying and selling are the most important signals. If a seller wants an offer to buy then the palms of their hands should face towards the buyer and if a buyer is searching for a seller then his palms should face inward towards his body.
  • The number of contracts being sold can be indicated by using the trader’s fingers. For 1 to 9 contracts the trader touches his chin, when in multiples of 10 then he touches his forehead and for multiples of 100 he touches his forehead with a fist.
  • A STOP is signified by a hand signal that is composed of a fist against the palm. This means that there is a stop order and the price has already a specific level which compels the broker to immediately trade for the best price that is currently available.
  • An order that is canceled or already filled is signified by the trader by placing their hand across the throat.
  • A trade must mention whether the option is call or a put by the usage of their hands. A call is signaled by forming the letter “C” with their hand and a put by forming what looks like an “OKAY” sign with their hand.

 

Importance of Open Outcry System:

  • The open outcry method has been around for quite some time now and is considered the most effective as it allows for the buyer and seller to match. This method allows for traders to come face to face and trade with each other.
  • Face-to-face trading allows the traders to study the body language, facial expressions and also understand the perspective of the opposite trader and thus make the ultimate decision of whether to trade or not.
  • Any trader can enter the market and take advantage of the widespread in an open outcry system but it is not the case in the electronic system as only a small number of large market makers could keep the spread wider than necessary.

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Bottom Line:

The reality is that trading is far more efficient in current times with eh electronic method than the open outcry method used in the past. The evidence is increased execution speed and decreased trading fees. Thus, the bottom line is that there are hardly any chances of the open outcry method returning and becoming popular once again among the traders.

Author -Sanjana Rau

About the author- Started my journey of self even when the odds were against me, keen observation, a cool temper, and sports worked the best for me.

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