Open outcry system: Explained
BY TIO Staff
|August 12, 2024The open outcry system, a method of communication between professionals on a stock or futures exchange, has been the backbone of the trading world for centuries. It involves shouting and the use of hand signals to transfer information primarily about buy and sell orders. The system is used in face-to-face trading environments like trading pits or rings at a stock exchange.
Despite the advent of electronic trading platforms, the open outcry system still holds a significant place in the trading world, particularly in commodity futures markets. This article will delve deep into the intricacies of the open outcry system, its history, its role in modern trading, and its advantages and disadvantages.
History of the Open Outcry System
The open outcry system has a rich history that dates back to the mid-19th century. It was first introduced in the Chicago Board of Trade (CBOT) in 1865 and soon became the standard method of trading in stock and commodity exchanges worldwide. The system was designed to provide a transparent and efficient means of trading large volumes of commodities and securities.
Throughout the 20th century, the open outcry system was the primary method of trading on major exchanges. However, with the advent of electronic trading in the late 20th century, the use of open outcry began to decline. Despite this, it remains a vital part of several major exchanges, including the New York Mercantile Exchange (NYMEX) and the London Metal Exchange (LME).
The Decline of Open Outcry
With the advent of electronic trading platforms in the late 20th century, the open outcry system began to see a decline in its use. Electronic trading offered a faster, more efficient, and more accessible method of trading, which led many exchanges to transition away from open outcry.
Despite this decline, the open outcry system is still used in several major exchanges. These exchanges maintain that the open outcry system provides a level of transparency and efficiency that cannot be matched by electronic trading platforms.
How the Open Outcry System Works
The open outcry system is a method of communication used in stock and futures exchanges. It involves traders shouting and using hand signals to communicate their buy and sell orders in a trading pit. The system is designed to provide a transparent and efficient means of trading large volumes of commodities and securities.
Traders in the pit use specific hand signals to indicate the type of order (buy or sell), the quantity of the order, and the price of the order. These signals are quickly recognized and interpreted by other traders in the pit, allowing for rapid execution of trades.
Hand Signals in Open Outcry
In the open outcry system, traders use a series of hand signals to communicate their orders. These signals are designed to be easily recognizable and interpretable by other traders in the pit. The signals vary slightly from exchange to exchange, but they generally involve gestures to indicate the type of order, the quantity, and the price.
For example, a trader might raise one hand with the palm facing outward to indicate a sell order, or with the palm facing inward to indicate a buy order. The number of fingers shown can indicate the quantity of the order, and specific gestures can indicate the price.
Advantages of the Open Outcry System
The open outcry system has several advantages that have contributed to its continued use in certain exchanges. One of the primary advantages is the level of transparency it provides. In the open outcry system, all orders are made publicly in the trading pit, allowing all traders to see the orders and react accordingly.
Another advantage of the open outcry system is the ability to handle complex trades. In electronic trading, complex trades can be difficult to execute as they often require manual intervention. However, in the open outcry system, these trades can be negotiated and executed directly between traders.
Disadvantages of the Open Outcry System
Despite its advantages, the open outcry system also has several disadvantages. One of the primary disadvantages is the potential for errors. In the chaotic environment of the trading pit, it is possible for mistakes to be made in the communication and execution of orders.
Another disadvantage of the open outcry system is its limited accessibility. The system requires physical presence in the trading pit, which can limit the number of traders who can participate. Additionally, the system can be intimidating for new traders, as it requires a thorough understanding of the hand signals and procedures used in the pit.
The Future of the Open Outcry System
The future of the open outcry system is uncertain. With the continued advancement of electronic trading platforms, many believe that the open outcry system will eventually become obsolete. However, others argue that the system provides a level of transparency and efficiency that cannot be matched by electronic trading.
Regardless of its future, the open outcry system has left an indelible mark on the trading world. Its unique method of communication and its ability to handle complex trades have made it a vital part of the history and culture of trading.
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