Open Outcry Definition

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.

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 marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price.read more.

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 floorsTrading FloorsTrading Floor is a place where traders buy and sell shares, fixed income securities, commodities, foreign exchange, bonds, options, etc. It is the market segment in which dealers trade financial instruments in various exchanges, for example, Bombay Stock Exchange (BSE) and the New York Stock Exchange (NYSE).read more where the traders gather and communicate orders between them. StockbrokersStockbrokersA stockbroker is an individual or company qualified enough to trade securities in the financial markets on behalf of financial institutions, individual and institutional investors, and organizations. They can work either independently as a professional trader or broker-dealer or associate with a brokerage firm.read more 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 marketsFutures MarketsA futures market is a financial marketplace where participants trade futures contracts for commodities, stock indices, currency pairs, and interest rates at a pre-determined rate and agreed-upon future date. It, thus, protects investors and traders from losing money on a transaction even if the price of the commodity or financial instrument rises or falls later.read more 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 makersMarket MakersMarket makers are the financial institution and investment banks which ensures enough amount of liquidity in the market by maintaining enough trading volume in the market so that trading can be done without any problem.read more 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 exchangesStock ExchangesStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more. 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:

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 –

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.

  • Eurex ExchangeAuction MarketReverse Auction