Open Outcry in Stock Exchange: Types, Functions, and Origin 

Open Outcry History
Open Outcry in Stock Exchange: Types, Functions, and Origin

Open Outcry is a physical activity using hand gestures and signals and shouts. Open Outcry was the traditional method of trading that was prevalent in the years preceding 2010. The open outcry trading method was used to trade stock options and in future exchanges before the 2000s, when electronic trading was still a novel idea. Stock Exchanges used to have trading pits in those days to facilitate open outcry trading. Trading pits are huge arenas with multiple layers of platforms. Layers of platforms of varying heights would enable traders to get a good view. Traders and professionals gather together and sometimes in color-coded dresses, and they broker deals from across these pits.

Open outcry trading was considered the preferred trading method among users for quite some time. Open outcry trading survived even after the advent of other methods like telephone trading and, of course, electronic trading. Open outcry trading lets traders have a tangible experience of the stock market. Similar to an auction, the traders are given the opportunity to view other traders and gauge their personalities and emotions. 

Even still, Open outcry trading has been effectively replaced by electronic trading systems. In the current world, there might only be a handful of trading floors, and even then, those trading floors might be a part of a hybrid market. A hybrid market is a stock exchange that has both floor trading as well as electronic trading. 

With that being said, the first exchange to transform from outcry to electronic trading was the Chicago Mer tile Exchange (CME). Chicago Mer tile Exchange launched a new global electronic trading system called the Globex. The technological advancement happened in the year 1992. Electronic Trading systems are more efficient on the basis of information acquired and the time taken to buy and sell. They are also cheaper and much more accessible in the current world. But even still, there are a group of loyal users of floor trading who are of the opinion that outcry would have helped them to get a feel of the impalpable factors which would have otherwise let them make sound decisions. Apparently, floor trading would have enabled the investors to assess other traders and their human behavior and body language to come to a conclusion on whether to buy or sell.

But such a traditional and authentic method of trading is slowly burning its last few embers. The few floor trading enterprises include London Metal Exchange, CBOE, and NYMEX, among others.

What was the primary function of Open Outcry?

The open outcry has catered to the needs of the stock exchanges since the initial days of its inception. Electronic trading has replaced open outcry trading due to the fact that technology has become much cheaper. But during the time Open outcry lasted, it had many functions. Some of which are relevant even to this day.

There are three main functions to open outcry trading. The first one is that it lets traders and professionals meet with other traders, and they make decisions to buy and sell shares based on their facial expressions and other factors like body language and the overall vibe of the exchange. The open outcry would help in matching the seller and buyer over a price. Close contact with the traders leads to fair price discovery. 

Secondly, open outcry trading is quite similar to auctions, and thereby all the offers and bids made in the stock exchanges are transparent and subject to limited manipulation. There won’t be any over-the-counter deals that would include brokers. There is only a market maker, and every sale goes through a centralized channel which is the trading floor. A trading floor is a public place, and it has got a standard of transparency that makes the workings of the stock exchange efficient.

Thirdly, any changes or updates in prices are made aware to the crowd fast. Thereby enabling traders to make appropriate share movements quickly. The trading pit is a very crowded area with hundreds of traders shouting and yelling over and above each other. Every trader might also meet each other in similar circumstances. There are also specific hand signals which would mean different processes in the stock market that include buying a particular number of shares or executing an order.

Was Open Outcry an Alternative to Electronic Trading?

No, the open outcry was not inherently an alternative to electronic trading. Open Outcry, on the other hand, is a predecessor to electronic trading. Electronic Trading has made a revolutionary change in the secondary market sphere. The induction of electronic trading in the stock market was an inevitable process, and it happened right on time. Electronic trading has made trading more efficient and updated than the previous method in a technologically developing world. Moreover, Electronic trading is much cheaper and faster than open outcry trading.

Why is an Open Outcry called Floor Trading?

Open Outcry is also called floor trading because it is a physical trading activity that takes place on a trading floor inside a stock exchange. In Open Outcry, trading traders take to the floor literally to buy and sell equities, options, futures, or any other financial instruments. Floor trading is an apt word to describe the activity since the traders form a huge crowd on the floor where there are many trading pits to facilitate trading. Trading pits give traders a platform to view the whole trading activity and process. 

How did Traders use Asymmetry in Stock Prices in Open Outcry?

Asymmetry in trading would mean that there is an intelligence gap between the traders on the basis of the information they have. Asymmetry in stock prices enables a certain number of traders to have more data than the rest. Asymmetry in stock prices is not encouraged by the people as a whole. The intelligence gap is considered an unfair means for traders to get better bids. Open outcry trading is a traditional method of trading and due to which most of the information regarding the stocks and shares and their prices aren’t equally accessible by all. Even though they were readily available, traders would have to put in a lot of effort to gather these data and analyze them to form meaningful conclusions. 

What is a Trading Pit in Open Outcry?

The trading pit is the place where open outcry trading where buying and selling of shares, options, and other securities takes place. Trading pits are synonymously known as trading floors. The situation on the trading floor or a trading pit is similar to that of an auction. Although, instead of bidding for a single commodity, in a trading pit, selling and buying happen together between quite a lot of people at the same time.

Trading Pit in Open Outcry
Trading pit

Usually, during market hours, trading pits are crowded with traders, and they might be seen in action. Action would include shouts, screams, and violent hand gestures. Traders shout their number of buys and various other orders with the help of these signals and gestures. A Trading pit is typically in the shape of different layers of rings. A trading pit type of construction would provide the traders with a wide view so that they could see everything from that position. Traders might want to make eye contact with multiple people at the same time to make bids. In the current world, trading floors are used to describe the place where traders work in banks and exchanges.

How does Price Discovery happen in Open Outcry?

Price Discovery is considered a process where traders find the prices of a stock or the underlying commodity. Price discovery happens in an open outcry on the trading floor of an exchange. Some may say that the traditional way of price discovery was through Open Outcry instead of the present method of electronic trading. In Open outcry, trading price discovery happens when traders face each other. A seller would be able to popularise his bids even before the order is made. In some cases, floor traders or scalpers bring about a different price variation. And these are figured out earlier if the trader is prudent enough. On the other hand, orders are placed first, and then they are executed in the electronic trading method. Another way of price discovery is to check whether the market is volatile or not. The vibe of the market is identified by the sudden rush or burst of activity. Usually, markets are considered to be volatile during the start of the market day and at the end of the day. Electronic trading may give system-generated data, but it is still intangible and changes in a split second, which cannot be predicted. 

How did Electronic Trading affect Open Outcry?

Electronic trading was the successor of open outcry trading. Electronic trading has already become the default method for every other trader in the current world. The effect of electronic trading on open outcry is considered quite overwhelming. Open outcry trading has been replaced by electronic trading within a short span of time because electronic trading is much cheaper and is easily accessed by people around the globe. In a current global scenario where all the previous methods are being replaced, it is only a matter of time for the sphere of the stock market undergoes improvements. Although, some loyal users of open outcry trading may feel that traditions are being lost in the process or the advantage of meeting the traders in real life is lost. But there are still some stock exchanges that still allow humans on the trading floor. They are called hybrid markets

What was the strongest advantage of Globex against Open Outcry?

Globex is the first electronic trading system, and it was introduced by the Chicago Mer tile Exchange (CME). Globex, despite being an electronic trading system, has become one of the sought-after trading platforms for people from all across the world. Due to its technological functionalities and features, and services, Globex has one-upped the traditional method of Open outcry. Instead of seeing electronic trading and open outcry trading as two separate entities, electronic trading is seen as something which complements the traditional method. One of the strongest advantages of Globex is that it automatically matches sellers and buyers through its electronic matching systems. 

What was the strongest Advantage of Open Outcry against Electronic Trading?

Open outcry trading is a very straightforward way of trading stocks, futures, options, and other financial instruments. Open outcry trading is very similar to auctions, where bids are made, and the strongest advantage of it might be that, just like in auctions, traders see and meet their peers and fellow traders. Traders have the opportunity to evaluate them and make a decision accordingly. The open outcry method also improves the liquidity of the market. Liquidity would mean that the number of trades happening at a particular time period is more. Since every trader that comes to the floor is to trade and a minute of distraction would cost a lot.

How did Investors analyze Stock Prices in Open Outcry?

Stock prices in the stock market are analyzed by the investors in open outcry trading, mainly by identifying the volatility of the market. Stock prices are subjected to fluctuations. Both buyers and sellers come to a unanimous decision to trade if they feel that the prices are agreeable. Investors then did not have digital data, and information was only known through the exchange. Therefore, price discovery and analysis were all done based on the behaviors of the traders present on the floor or in trading pits.

How did Market Makers work in Trading Pits?

Market makers are the middle person in the stock market, like brokers, who create an avenue for liquidity. Market makers allow for the smooth process of buying and selling shares. They are the ones who execute the trades. Market makers are easily recognized in the trading pits due to their brightly colored jackets, also known as trading jackets. Trading jackets sets them apart from the other traders, and they may contain the logo of the firm or who they represent. In the years after the 9/11 attacks, the trading jackets were mostly in the color of the American national flag in the United States of America. Market makers are those people who direct the flow of buying and selling of shares. In trading pits, market makers would have an inventory of all shares, and as and when required, they allocate these shares to those who want them or bid for them. In between the process, the market makers also make a small commission based on the offered price and the price at which it is sold. The bid price might be a bit more. Market makers ensure the efficiency of the open outcry and ensure the liquidity of the market.

What is the main difference between Over-the-counter Trading?

An over-the-counter market is a decentralized market that allows buying and selling of commodities through the help of a dealer. Over-the-counter trading is for those companies who didn’t meet the prerequisites to be listed on the stock exchange, and over-the-counter trading need not have a physical venue to take place, unlike open outcry trading. Another difference is that they may not be as transparent in their dealings as the other centralized trading processes. Over-the-counter trading works 24/7 and is used for trading in stocks, options, futures, and all the other securities which come outside the exchange. 

How did Technical Analysis work in Open Outcry?

Technical analysis is performed by traders to predict the stock market and invest accordingly. Technical analysis helps traders to find when to enter the market and when to exit the market. Understanding the market is imperative for any trader to be successful in making profits. In Open outcry trading, traders used to perform technical analysis in the form of reading chart patterns and candlestick patterns. They refer to data from the previous time periods and compare it with the current data. Theories like Dow theory which was propounded by Charles Dow in the 1850s formed the core of the technical analysis. These theories talked about price movements and market actions. Technical analysis also included considering the information given out by news outlets about various stocks and companies. Technical Analysis is an amalgamation of all of these. Technical analysis is based on the current data. If the prices fluctuate, then the predictions also change. Therefore, technical analysis cannot be said to be 100% accurate. Since technological advancements were still new during the open outcry phase of the stock exchanges, the process of technical analysis was a bit too slow. Information was hard to acquire, and understanding the information needed a whole level of effort. 

How did Fundamental Analysis work in Open Outcry?

Fundamental Analysis in Open outcry trading would include understanding the company or seller in the first place. Fundamental Analysis is performed by traders by looking at the value of the stock or the potential of the company. Therefore, traders in open outcry would take economic situations and market conditions into consideration. While a technical analyst looks at past charts and figures, a fundamental analyst would look at the industry and the company’s growth as a whole. By using fundamental analysis, traders are trying to find those stocks which are undervalued or overvalued. Thus making decisions to buy or sell. Fundamental Analysis, when compared to technical analysis in open outcry trading, was much more accurate and faster. 

When did Open Outcry end in the Stock Exchange?

Stock exchanges had open outcry trading as a part of their trading methods even after the advent of electronic trading and digital systems. Stock exchanges are, however, slowly transitioning to electronic trading entirely. . Open outcry saw the beginning of its end with the advent of new and advanced technology. When one exchange, namely the Chicago Mer tile Exchange, converted to electronic trading, others followed suit. Technological breakthroughs in the market sphere would inevitably bring demise to the already existing methods. And with technological breakthroughs comes more advantages and ease of doing things. Electronic trading methods have been found to be helpful for traders, and it has made their work easier in terms of the effort they have put in before. 

What was the last Open Outcry Exchange in the world?

The final open outcry trading ring existed in Europe’s London Metal Exchange (LME). LME was officially established in the year 1877. LME started trading with metals like copper, zinc, and lead. The exchange also provides options and futures trading for various other metals and elements. Open outcry trading was conducted in these exchanges using Rings. But, after the covid pandemic took place, there was a halt in the Ring activities. Furthermore, in the year 2021, there were even talks about closing the ring altogether. 

Do Hybrid Stock Markets use Open Outcry?

The hybrid stock market involves both traditional methods of trading as well as electronic methods. The hybrid market incorporates elements of both methods and is an excellent way of preserving the previous methods. In the current global scenario where electronic trading has replaced open outcry trading, hybrid markets help to keep running the trading pits. Because trading pits are the original ways to regulate liquidity. Hybrid markets use open outcry trading extensively, and numerous exchanges give a platform for traders to do open outcry trading along with electronic trading methods. 

Which Stock Markets converted to Electronic Trading?

Electronic trading was increasingly gaining popularity after the induction of Globex. Globex was the first electronic trading platform to reach traders to be used worldwide. In the year 1971, NASDAQ was created to be an all-electronically performing stock exchange. NASDAQ became the largest stock exchange after the New York Stock Exchange (NYSE). NYSE was still an open outcry trading exchange then. After Globex came into service, other stock exchanges followed suit to create their own platforms of electronic trading. The following are a few of the major stock exchanges that made the change to electronic trading.

·        The London Stock Exchange made the change to electronic trading in 1986.

·        Borsa Italiana converted in the year 1994.

·        Toronto Stock Exchange in the year 1997.

·        Tokyo Stock Exchange in the year 1999.

By 1999 point, it was only America that still used open outcry trading. The rest of the world’s stock exchanges have completely moved over to the electronic trading method. 

How did Communication work in Open Outcry?

Communication in the open outcry was similar to an auction. Communication would include using hand gestures, signals, and symbols. But most importantly, open outcry trading uses shouts and screams. In the trading pits, traders are looking forward to getting their bids or offers to be noticed by other traders. In the chaotic atmosphere of a trading pit, communication has got to be quick, precise, and to the point. The traders should also know what exactly they want, and they should also know how to show that to other traders. Amidst the traders, stockbrokers also shout the number of shares that are up for sale. Their speculated costs are also occasionally shouted out. There are different kinds of traders like a scalper, who is individual traders, floor traders, who are those traders who come on behalf of the client, etc. But anybody who wants to be on the trading floor should be educated and should also have an account or, in other words, membership in the stock exchange.

On the trading floor, there are traders who shout their bids and offers, but on the sidelines, there are employees of the stock exchange itself who are noting down these closed trades, and they are entered into the system or database. There are also huge screens with changing numbers. If you look closely for a few more minutes into the workings of the trading floor, you even see people running around the pits who are taking confirmation of the completed trades to inform the clients. 

How did Traders use Hand Signals in Open OutCry?

Traders generally used accepted hand signals in open outcry trading. Traders are also found to be shouting and screaming. The accepted hand gestures are seen from afar even if the shouts are not heard. A few of the common hand gestures used on the trading floor are given below.

Hand Signals in Open OutCry
Hand signals in open outcry

·   To buy an offer, the trader’s both palms should be facing inwards, signifying when you are looking for a seller. It symbolizes that you are taking in something.

·   If you are a seller and are looking for buyers, then face your palms outward toward potential buyers letting them know that you have something to sell.

·   The number of shares to buy and sell are also depicted using hand signals through various actions. Like for a zero, a closed fist is shown. 

What are the Images of Open Outcry Exchange?

  1. New York Stock Exchange
Open OutCry New York Stock Exchange

2. London Stock Exchange

Open OutCry London Stock Exchange

3. Toronto Stock Exchange

Open Outcry Toronto Stock Exchange

4. Columbo Stock Exchange

Open Outcry Columbo Stock Exchange

5. Johannesburg Stock Exchange

Open Outcry Johannesburg Stock Exchange

6. Korea Stock Exchange

Open Outcry Korea Stock Exchange
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