Open Outcry

An open outcry is a trading approach generally employed on a pit for stock, option, & futures exchanges. It entails the usage of oral & gestural signs by traders to convey trading details, intentions, & acceptance. However, it facilitates an organized method ensuring the systematic matching of bids & offers. 

The traders’ face-off assists all parties in comprehending each other’s mannerisms & making decisions accordingly. In addition, it helps closely evaluate the market volatility with an individualized trading experience. Since 2010, electronic trading has successfully displaced this trading system, except for a few stock exchanges.

• 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 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

1. Seller’s palm facing toward the buyer (to buy an offer)
2. Buyer’s palm facing toward the seller (looking for a seller)
3. Trader’s fist against the palm (STOP order), & 
4. Trader’s hand across the throat (order canceled or already filled)
5. An ok signal with the hand( a put symbol)
6. 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. 

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. 

1. 1986 – London Stock Exchange (LSE)
2. June 7, 1996 – Johannesburg Stock Exchange (JSE)
3. 1997 – Columbo Stock Exchange (CSE), Toronto Stock Exchange (TSE), & Korea Exchange (KRX)
4. April 7, 2005 - International Petroleum Exchange (IPE)
5. 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. 

Here is a comparison between open outcry and electronic trading system:

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