How Open Outcry Trading Works

Open outcry exchange trading is the original style of trading that stock and commodities brokers used to use. Today it is a much smaller segment of total market trading, but still very important. In open outcry exchanges the method of communication between traders involves shouting and the use of hand signals to transfer information, primarily about buy and sell orders. The part of the trading floor where this takes place is called a "pit".

Examples of markets, which still utilize this type of system are; the New York Mercantile Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade, and the Chicago Board of Options Exchange. The open outcry system is being replaced all over the world by electronic trading systems. Proponents of electronic trading make the claim that they are faster, cheaper, more efficient for users, and less prone to manipulation by market makers and broker/dealers. On the other hand, many traders still back the open outcry system because the physical contact allows traders to speculate as to a buyer/seller's motives or intentions and adjust their positions accordingly.

Floor hand signals are used to communicate buy and sell information in open outcry exchanges. Traders typically flash signals across a room to make a sale or a purchase. Signals that occur with palms facing out and hands away from the body are an indication the gesturer wishes to sell. When traders face their palms in and hold their hands up, they are gesturing to buy.

Numbers one through five are gestured on one hand, and six through ten are gestured in the same way, only held sideways at a 90-degree angle (index finger out sideways is six, two fingers is seven, and so on). Numbers gestured from the forehead are blocks of ten. Blocks of hundreds and thousands can also be displayed. The signals can also be used to indicate months, specific trade or option combinations, or additional market information.

The Chicago Mercantile Exchange(CME) first invited members to trade futures contracts on agricultural commodities via the open outcry system. Open outcry was and still is an efficient means of "price discovery". It allows buyers and sellers to arrive at the best prices given the supply and demand for a futures or options product. When you call your broker and tell him to make a trade on your behalf, he relays that message to the trading floor, where a runner then relays the message to the floor broker, who then executes the trade. The runner then relays the trade confirmation back to your broker, who tells you how it went. Finally, the trade reporters on the floor of the exchange watch for executed trades, record them, and transmit these transactions to the exchange, which, in turn, transmits the price to the entire world almost simultaneously.