Open Outcry is a traditional method for trading commodities and financial instruments on a commodity exchange. It involves traders physically shouting their buy or sell offers, accompanied by hand signals, to communicate their trades. This method has historic significance and has been a cornerstone of commodity exchanges before the advent of electronic trading platforms.
The Mechanism of Open Outcry
Shouting and Hand Signals
In an open outcry system, traders communicate offers to buy or sell by shouting. They may also use a system of hand signals to convey more detailed information quickly and effectively. When a trader shouts that they want to sell at a particular price and another trader responds by shouting that they want to buy at that price, the two traders have effectively made a contract.
Recording the Trade
Once a buy and sell price is matched through the open outcry method, the transaction details are promptly recorded. This record-keeping ensures the integrity and execution of the trade, providing a transparent and verifiable transaction history.
Types of Trades
Spot Trades
Spot trades are immediate transactions where commodities are traded for quick delivery. In the open outcry system, these trades are executed rapidly with available cash flows.
Futures Contracts
Futures contracts, where the commodity is delivered at a future date, involve negotiations made on the trading floor via open outcry, with the terms recorded for future execution.
Special Considerations
Immediacy and Clarity
One of the essential characteristics of open outcry is the immediacy and clarity it provides. Each transaction is conducted openly, which can reduce misunderstandings and ensure transparency.
Auditor’s Role
Auditors or exchange officials often monitor the trading floor to ensure no fraudulent activity or unethical practices take place during the trade.
Examples from History
Chicago Board of Trade (CBOT): Established in 1848, CBOT used open outcry for many years as its primary trading mechanism. It has historical significance as one of the largest and most influential commodity exchanges worldwide.
New York Mercantile Exchange (NYMEX): NYMEX also prominently used open outcry for trading oil and other commodities, becoming known for its energetic trading floor.
Applicability in Modern Times
With technological advancements, open outcry has largely been replaced by electronic trading systems which provide greater efficiency and higher-speed execution. However, certain commodity exchanges still employ open outcry during specific trading sessions to preserve traditional practices.
Comparisons and Related Terms
Electronic Trading
Unlike open outcry, electronic trading platforms use digital systems to execute trades almost instantaneously, reducing the need for physical presence on the trading floor.
High-Frequency Trading (HFT)
HFT utilizes algorithms and supercomputers to conduct trades at extraordinary speeds, contrasting sharply with the manual and vocal nature of open outcry.
Frequently Asked Questions
What is the main advantage of open outcry? The primary advantage of open outcry is its transparency and the immediacy of trade execution, reducing the chances of miscommunication.
Why has most trading moved away from open outcry to electronic systems? Electronic trading systems provide faster execution, greater market access, and reduced costs, making them more efficient than the traditional open outcry method.
Are there still commodities traded via open outcry today? Yes, some commodity exchanges still use open outcry for specific sessions or types of trades to honor traditional practices.
Summary
Open outcry represents a historic and transparent method of trading commodities where traders vocally and physically communicate their buy and sell orders. Despite being largely superseded by electronic systems, it remains an iconic method reflecting the rich history of financial and commodity markets on major exchanges.
References:
- “Open Outcry History and Evolution,” Commodity Trading Journal.
- “Electronic Trading vs. Open Outcry,” Financial Markets Quarterly.
