Definition
Open outcry is a method of communication used in trading firms to convey bids and offers. This system involves verbal bids and offers and hand signals to express trading actions and is generally used in stock exchange or commodity exchange. Despite its decrease in use due to technological advancement, it is still upheld in some traditional exchange environments.
Phonetic
The phonetic spelling of “Open Outcry” is: /ˈoʊpən ˈaʊtkraɪ/
Key Takeaways
- Open Outcry is a method of communication between professionals on a stock exchange or futures exchange. It’s typically used for communicating buy and sell orders in a trading environment.
- This system relies on verbal commands and hand signals to conduct transactions, making it a highly physical and potentially chaotic form of trading. Despite this nature, it’s effective in ensuring transparency and fairness in trade execution.
- While Open Outcry was the primary method used in trading exchanges globally, advancements in technology and the rise of electronic trading systems have led to its decline. However, some exchanges like the Chicago Mercantile Exchange still maintain open outcry pits for certain commodities.
Importance
Open outcry is an essential term in the field of business and finance as it refers to a method of communication used in stock exchanges and commodity futures exchanges, where traders use verbal signals and hand gestures to buy or sell securities. This method aids in ensuring transparency, immediacy, and competition in the financial markets as it allows for all participants to simultaneously see and hear all bids and offers, preventing any manipulation. Despite being replaced by electronic trading systems in many exchanges due to their greater efficiency, understanding the concept of open outcry still remains crucial to gain insights into the historical practices and foundation of trading operations in financial markets.
Explanation
Open outcry is predominantly used in exchange-based environments, for instance, stock exchanges or futures exchanges, for the purpose of communicating, executing trades, and facilitating transactions. It’s a system where trades are conducted by an auction-like process that involves shouting and signaling. This method was primarily designed to create a transparent and fair trading environment – buyers and sellers shout out prices and quantities so that all participants can hear and have an equal opportunity to act upon the trade proposals. The process allows for the determination of market prices in a dynamic fashion through supply and demand.Beyond just facilitating trades, the system is also used to provide price and trading information to all market participants in real-time. It’s the loud, public openness of the open outcry system that enables traders to react swiftly to market changes, creating efficient and competitive markets. It is also used for managing risk and discovery of prices through a broad, albeit decentralized, distribution of information. Although less common in the era of electronic trading, open outcry remains a vital trading method in certain circles where split-second, in-person communication is invaluable.
Examples
Open outcry is a method of communication between professionals on a stock exchange or futures exchange, which involves shouting and using hand signals to convey buying and selling information. It’s been largely superseded by electronic trading systems, but here are three examples when it was prominently used:1. New York Stock Exchange (NYSE): Open outcry was the main method of trading on the NYSE until the late 20th century, when it started incorporating electronic trading. Even now, however, some trading activity on the NYSE floor is conducted through open outcry.2. Chicago Mercantile Exchange (CME): Until about 2015, the CME used open outcry for many commodities futures contracts. These days, many of these contracts are traded electronically, but some pit trading via open outcry still occurs.3. London Metal Exchange: One of the last major exchanges to still use open outcry. As of now, this exchange conducts open outcry trading for a few hours each day, with electronic trading covering the rest of the 24-hour trading day.
Frequently Asked Questions(FAQ)
What is Open Outcry?
Open Outcry is a method of communication used between traders in a stock exchange to execute trade orders. Traders shout and use hand signals to communicate.
Where is the Open Outcry method used?
It is used in many large stock exchanges across the world, such as the New York Stock Exchange and the Chicago Mercantile Exchange, but its usage has decreased with the advent of electronic trading.
How does Open Outcry work?
Brokerage firms and traders communicate bids and offers in the trading pit. The highest bidding and lowest offering are often matched to execute the trade.
What is a trading pit?
A trading pit is a physical area on the trading floor of an exchange where the open outcry method is used. It is the place where trading activities occur.
Why is Open Outcry important?
Open Outcry, though old-fashioned, ensures transparency in transactions as all the participants can see the trades being executed. It offers a chance to get a better pricing through direct, real-time negotiation.
What are the limitations of Open Outcry?
Limitations can include the noise and chaos in the trading pits, making it prone to errors. It’s less efficient than electronic trading and doesn’t integrate well with digital record-keeping systems.
How has electronic trading affected Open Outcry?
The advent of electronic trading has largely replaced Open Outcry due to its efficiency, accuracy and the ability to integrate with digital systems. However, some exchanges still use Open Outcry for complex transactions.
Can both electronic trading and Open Outcry be used together?
Yes, several exchanges use a dual system where electronic trading is used for most transactions, but Open Outcry is used for more complex or larger transactions.
Related Finance Terms
- Trading Pit
- Floor Trader
- Bid and Ask Spread
- Commodity Exchange
- Order Types ( Market, Limit, Stop)
