Open outcry

Until 2009^[1], trades on the floor of the New York Stock Exchange always involved a face-to-face interaction. There is one podium/desk on the trading floor for each of the exchange's three thousand or so stocks.

NYSE's stock exchange trading floor before the introduction of electronic readouts and computer screens.

Open outcry is the name of a method of communication between professionals on a stock exchange or futures exchange which involves shouting and the use of hand signals to transfer information primarily about buy and sell orders.^[2] The part of the trading floor where this takes place is called a pit.

Examples of markets which use this system in the United States are the New York Mercantile Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade, and the Chicago Board Options Exchange. In the United Kingdom, the London Metal Exchange still makes use of open outcry.

The open outcry system is being replaced by electronic trading systems (such as CATS and Globex). The supporters of electronic trading claim that they are faster, cheaper, more efficient for users, and less prone to manipulation by market makers and broker/dealers. However, many traders advocate for the open outcry system on the basis that the physical contact allows traders to speculate as to a buyer/seller's motives or intentions and adjust their positions accordingly. Today, most stocks and futures contracts are no longer traded using open outcry due to the lower cost of the aforementioned technological advances.

A "trading floor" is a trading venue. This expression often refers to a place where traders or stock brokers meet in order to buy and sell equities, also called a pit. Sometimes, the expression "trading floor" is also used to refer to the "trading room" or "dealing room", i.e. the office space where market activities are concentrated in investment banks or brokerage houses. But, technically speaking, these two spaces are different.

Hand signals

Main article: Hand signaling (open outcry)

Floor hand signals are used to communicate buy and sell information in an open outcry trading environment. The system is used at securities exchanges such as the Chicago Mercantile Exchange.

Traders usually flash the signals quickly 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, and blocks of hundreds and thousands can also be displayed. The signals can otherwise be used to indicate months, specific trade or option combinations, or additional market information.

These rules may vary among exchanges or even among floors within the same exchange; however, the purpose of the gestures remains the same.

Conversion to electronic trading

• The London Stock Exchange moved to electronic trading in 1986.
• The Borsa Italiana, Italy's stock market, located in Milan, moved to electronic trading in 1994.
• The Toronto Stock Exchange (TSX) adopted electronic trading in 1997.
• International Petroleum Exchange (IPE) moved to electronic trading in 2005^[3].
• Minneapolis Grain Exchange (MGEX) moved to electronic trading in 2008^[4].
• Johannesburg Stock Exchange
• New York Stock Exchange, 2006-2007, under John Thain ^[5][6]

• New York Mercantile Exchange, 2006.

Since the 1980s, Nymex had held a virtual monopoly on 'open market' oil futures trading. However the electronically based IntercontinentalExchange, or ICE, began trading oil contracts that were extremely similar to Nymex's in the early 00s. Nymex began to lose business and/or market share almost immediately. The pit-traders at Nymex had been resisting the electronic move for decades, but the executives believed the exchange had to move to the electronic format, or it would cease to exist as a viable business. The executives introduced CME's Globex system into Nymex in 2006. ^[7]

References

1. ^ NYSE Next Generation Model fact sheet, 2008(PDF)
2. ^ The Art of Hand Signals floor trading hand signals PDF ( 455 KiB)
3. ^ Stevenson, Rachel (Mar 8, 2005 by Rachel Stevenson). "Petroleum exchange silences open outcry". Independent, The (London),. http://www.independent.co.uk/news/business/news/petroleum-exchange-silences-open-outcry-527625.html. Retrieved 2008-12-13. 
4. ^ Kelsey, Eric (October 2008). "Grain Exchange to Stop Open Outcry". http://www.tcbmag.com/dailydevelopments/dailydevelopments/106186p1.aspx. Retrieved 2008-12-17. 
5. ^ Technology squeezes out real, live traders, Adam Shell, USA Today, 2007 7 11
6. ^ He Fixed the NYSE. Can He Fix Merrill?, Bloomberg Businessweek (author not listed on website) NOVEMBER 26, 2007
7. ^ The Asylum, Leah McGrath Goodman, 2011, Harper Collins

External links

• New York Times Open Outcry Table
• TradingPitHistory.com - Trading Pit Hand Signals Gallery and Archive