The Open Outcry System is a traditional method of trading securities, commodities, and other financial instruments. It involves traders communicating verbally and using hand signals on a trading floor, allowing them to execute buy and sell orders. This manual form of trading was widely used in exchanges worldwide before the advent of electronic trading platforms.
Historical Context
Origins and Evolution
The Open Outcry System has its roots in the early commodity exchanges of the 17th century. Notably, it was prominently used in stock exchanges such as the New York Stock Exchange (NYSE) and commodity markets like the Chicago Mercantile Exchange (CME). This system facilitated efficient communication and order execution in active trading pits.
Transition to Electronic Trading
The last few decades of the 20th century witnessed a gradual shift from Open Outcry to electronic trading systems. Technological advancements and the need for faster execution, reduced errors, and lower transaction costs were primary drivers of this transition. By the early 21st century, most exchanges had adopted electronic trading platforms, although some trading floors still preserve the traditional Open Outcry System to a limited extent.
Characteristics of the Open Outcry System
Verbal Communication
Traders use loud and clear verbal communication to announce their orders. This helps in quickly relaying buys and sells among market participants.
Hand Signals
Hand signals are a critical component, especially in noisy trading environments. Each gesture or hand signal has a specific meaning, allowing traders to negotiate and confirm trades without relying solely on verbal communication.
Face-to-Face Interaction
Open Outcry trading occurs on the trading floor, where traders engage directly. This face-to-face interaction is believed to enhance the transparency and integrity of the trading process.
Applicability and Examples
Commodity Exchanges
The Open Outcry System has been extensively used in commodity exchanges for trading goods like wheat, oil, and precious metals.
Stock Exchanges
Certain stock exchanges, such as the NYSE, operated using the Open Outcry System for many years before embracing electronic trading.
Types of Orders and Execution
Market Orders
Market orders are executed immediately at the best available price. Traders use clear verbal commands and gestures to specify these orders.
Limit Orders
Limit orders are executed at a specific price or better. Traders specify their price using hand signals, and the order is filled when matching conditions are met.
Special Considerations
Speed and Efficiency
While the Open Outcry System is considered slower than electronic trading platforms, it offers unique benefits, such as immediate human judgment and intervention in complex trading situations.
Transparency
The physical presence of traders on the floor provides a level of transparency and trust, as trades are witnessed in real time.
Comparisons to Electronic Trading
Speed and Volume
Electronic trading systems can process orders at much higher speeds and volumes compared to the Open Outcry System.
Costs
Electronic systems generally offer lower transaction costs due to reduced labor and infrastructure expenses.
Related Terms
- Electronic Trading: A method of trading securities using computer systems and networks, facilitating faster and more efficient order execution.
- Trading Floor: A physical space in an exchange where traders participate in Open Outcry or other forms of trading.
- Market Maker: An individual or firm actively quoting buy and sell prices and maintaining market liquidity.
FAQs
Is the Open Outcry System still in use today?
What are the main advantages of the Open Outcry System?
How does the Open Outcry System compare to electronic trading?
References
- Harris, L. (2003). Trading and Exchanges: Market Microstructure for Practitioners.
- Levine, M. (2020). A History of Market Development and Technological Advancements.
- NYSE. (2023). The Evolution of Trading Systems at NYSE.
Summary
The Open Outcry System represents a significant historical trading method where traders rely on verbal communication and hand signals. Though largely replaced by electronic trading platforms, it remains an iconic element of financial market history, known for its transparency and efficiency in a pre-digital age.
