Open Outcry — Definition

Open outcry is a traditional method of trading in which traders communicate buy and sell orders face-to-face using vocal shouts and standardized hand signals within physical trading pits. It was once the primary way orders were executed on many stock, futures, and options exchanges but has largely been replaced by electronic trading systems.

How Open Outcry Worked

• Communication: Traders conveyed price, order size, and intent through a combination of verbal calls and widely recognized hand signals. Sequences and timing of signals conveyed acceptance or modification of offers.
• Execution: A trade was formed when one trader declared an offer to buy or sell at a price and another accepted that price, creating a contract in the pit.
• Auction-like environment: Open outcry resembled a public auction where multiple participants could compete for order flow, promoting price discovery and transparency among those present.

Trading Pits and Market Structure

• Trading pits: Physical sections on the trading floor, often tiered so traders could see one another, where crowd dynamics and eye contact helped facilitate rapid interaction.
• Market makers and pit traders: Much order flow funneled through market makers standing at the edge of pits, who passed trades to active pit traders. Most transactions occurred between members of the pit crowd.
• Hours: Open outcry sessions typically ran limited hours during the trading day; some commodity pits had shorter sessions (for example, certain CBOT contracts historically traded from mid-morning to early afternoon).

Transition to Electronic Trading

• Early electronic systems: The CME’s Globex electronic platform launched in 1992 and expanded near-continuous electronic trading across many futures and options products, operating from Sunday evening through late Friday afternoon with brief daily breaks.
• Advantages of electronic trading:
• Faster execution and order matching
• Lower transaction costs and narrower spreads
• Greater accessibility for retail and institutional traders via computers and mobile devices
• Easier aggregation and distribution of market data, reducing information asymmetry
• Reduced susceptibility to some forms of human manipulation
• Limits of electronic systems: Some professional traders note that electronic markets lack certain intangible inputs present in pits—mood, body language, and subtle behavioral cues—that could inform decision making in open outcry.

Pros and Cons of Open Outcry

Pros
– Real-time human judgment and nuance from direct interaction
– Visible competition among traders can aid price discovery for those present
Cons
– Slower and costlier than modern electronic execution
– Limited access—only participants physically present could benefit from pit information
– Harder to aggregate data and ensure consistent transparency across all market participants

Current Status and Legacy

Open outcry persists in a very limited number of markets and on rare occasions, but the dominant model for exchange trading is electronic. The shift has produced faster, cheaper, and more widely accessible markets. Open outcry survives mainly in historical memory, training, and cultural depictions of trading floors.

Key Takeaways

• Open outcry used vocal calls and hand signals in trading pits to create contracts between buyers and sellers.
• It promoted on-the-spot price discovery but relied on physical presence and temporary information advantages.
• Electronic trading platforms like Globex have largely replaced open outcry, offering greater speed, lower costs, and broader access.
• While some traders value the human cues of pit trading, the efficiency gains of electronic markets make a return to open outcry unlikely.