Definition
Open outcry is a method used in trading pits at commodities or futures exchanges where traders use verbal communication and hand signals to buy or sell securities. It involves shouting and using hand signals to convey trading information in an open pit on a trading floor. However, this method has been largely replaced by electronic trading platforms in most exchanges.
Key Takeaways
- Open Outcry is a type of public auction system for communicating economic transactions. It is most commonly seen on trading floors of different exchanges, like commodities or stock exchanges.
- This system works through traders using verbal and hand signal communication to perform transactions. It is a combination of shouting and signaling that makes the system an effective means of trading large amounts of commodities quickly.
- Although Open Outcry has been significantly diminished due to technology and electronic trading systems, it is still used in some exchanges because of its ability to provide very significant benefits; such as transparency, immediate execution, and better price discovery.
Importance
Open Outcry is an important term in finance because it refers to a method of communication used in public auction markets, including stock and commodity exchanges, to convey information about buy and sell orders.
This method involves physical actions and shouting, making the trading environment often chaotic and noisy.
The importance of Open Outcry lies in its traditional role in ensuring communication transparency and real-time price discovery, whereby orders are publicly called out for everyone in the trading pit to hear, facilitating competition and fair trading.
However, with advancements in technology, many exchanges have moved towards electronic trading systems, leading to a gradual decline in the use of Open Outcry.
Explanation
Open Outcry is a method used in commodity exchanges, where traders communicate their buy or sell orders verbally, which typically occurs on a trading floor known as a “pit.” The purpose of the Open Outcry system is to create a competitive and transparent marketplace for trading commodities or other financial instruments. This method ensures that the best prices are provided to market participants as the one who shouts the highest price for a buy order or the lowest price for a sell order wins the trade.
It’s a very dynamic, competitive, and transparent way of trading where everyone has access to the same information at the same time. The Open Outcry system serves a rather pivotal role in maintaining market integrity.
This system brings about high transparency as each transaction is visible and verifiable to all market participants in real time, ensuring fair play. Additionally, it fosters market liquidity, offering a trading environment where commodities can be bought and sold easily without major impact on the prices.
Open Outcry also encourages competition, since every trader in the pit has an equal opportunity to bid, ensuring a balance between supply and demand. Although its usage has decreased with the advent of electronic trading platforms, it still holds a prominent position in some commodity exchanges due to its competitive and transparent nature.
Examples of Open Outcry
1) Chicago Mercantile Exchange (CME): In the past, open outcry was a primary method of communication used by traders at exchanges like the CME where brokers shouted and used hand signals to express wishes to buy or sell futures contracts.
New York Mercantile Exchange (NYMEX): Before the advent of electronic trading platforms, open outcry trading was also widely conducted at NYMEX. Traders engaged in face-to-face interaction in trading pits, which often involved shouting and hand-signaling.
London Metal Exchange (LME): Known for being one of the last major exchanges to retain the practice of open outcry, the LME still uses open outcry for setting daily benchmark prices. It also offers electronic trading for users worldwide. The traders physically stand in a circle (also known as the ‘Ring’) and trade in sessions.
FAQs on Open Outcry
Q1. What is Open Outcry?
Open Outcry is a method of verbal and hand signal communication used by traders at stock exchanges and commodity exchanges. Traders shout and use hand signals to convey their buying or selling decisions on the trading floor.
Q2. Is Open Outcry still used today?
With the advent of electronic trading platforms, Open Outcry method has greatly declined. However, some exchanges like the New York Stock Exchange and the Chicago Mercantile Exchange still maintain Open Outcry trading pits.
Q3. What are the advantages of Open Outcry?
Open Outcry allows for effective communication and quick execution of trades on a massive scale. It also provides a transparent trading process since every participant can monitor the actions of others.
Q4. What are the disadvantages of Open Outcry?
The primary disadvantage is the potential for error due to the chaotic nature of trading floors. Noise and visual distractions may lead to misunderstandings, resulting in the execution of incorrect trades.
Q5. How do traders communicate in an Open Outcry system?
In an Open Outcry system, traders use a complex set of hand signals and verbal calls to communicate. Hand signals are used to indicate what is being bought or sold, the quantity, and the price.
Related Entrepreneurship Terms
- Trading Pit
- Floor Trader
- Loud Noise
- Hand Signals
- Commodities Exchange
Sources for More Information
- Investopedia: This comprehensive financial education website provides a detailed explanation on ‘Open Outcry’ within its dictionary of global finance terms.
- Financial Times: This leading source for business and financial news worldwide offers numerous articles and think pieces that delve deeper into ‘Open Outcry’ and its role in financial markets.
- The Motley Fool: This investor service providing world-class financial advice for life’s hardest decisions explains the concept of ‘Open Outcry’ along with its implications in stock exchange and trading.
- Bloomberg: Bloomberg provides financial information, news and insight around the world and has high-quality and detailed resources on the ‘Open Outcry’ system in operation.
