Open outcry is a method of verbal and hand signal communication used by traders at stock and futures exchanges. Signals and shouts convey trading information, intentions, and acceptance in the trading pits.
Open outcry is also called pit trading.
Breaking Down Open Outcry
Trading pits are the parts of trading floors where actual trading takes place. Traders make a contract when one trader declares they want to sell at a certain price, and another trader responds that they will buy at that same price.
Open outcry is similar to an auction where all participants have a chance to compete for orders. It leads to transparency, efficient markets, and fair price discovery. Because trading can occur between any two participants at any given time, it differs from over-the-counter trading where trading is negotiated between two parties privately.
The length of the trading day differs between open outcry exchanges and those that use electronic trading such as the Globex. Regular market hours typically run from 8:30 a.m. to 4:15 p.m. Eastern Standard Time. Open outcry sessions for some commodities such as corn futures and options (CBOT) run from 9:30 a.m. to 1:15 p.m.
First introduced in 1992, the Globex is the first global electronic trading system for futures and options. The Chicago Mercantile Exchange (CME) developed the Globex automated system. Electronic trading on Globex is available nearly 24 hours a day, from Sunday evening through late Friday afternoon. There is a short break each day between closing one day's trades and reopening the next day's trading. This break varies from 30 to 60 minutes, depending on the product of trading.
The End of Open Outcry Trading
While open outcry dates back centuries as the dominant method for trading, most exchanges now use electronic trading systems. These automated systems reduce the costs, improve trade execution speed, and create an environment less prone to manipulation. They also make it easier to aggregate information for all interested parties. Electronic trading is now available, often for free, on home computers and smartphones.
Some professional traders lament that electronic trading cannot capture the intangible information upon which pit traders relied. As an example, electronic trading is void of the subjective assessment of a buyer or seller's intentions or motivations. Electronics do not relay the mood of the trading pit, which is now only available in old movies. Trading Places, starring Eddie Murphy and Dan Aykroyd, provided a rather good look into the methods, frustrations, and even the advantages that experienced pit traders have at their disposal.