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Open Outcry

A trading method that uses verbal and nonverbal signals in communication

What is Open Outcry?

Open outcry is a trading method used in futures pits and stock exchanges that use verbal and nonverbal signals to communicate. It is why people see stockbrokers on TV shouting and using hand signals with each other, looking as if there’s a squabble in their midst.

 

Open Outcry

 

While stockbrokers yell jargons about how many contracts are for sale and for how much they are being sold, they also need to use gestures in order to get through to one another despite all the screaming. The open outcry method is effective and makes possible a structured process that ensures that the best bids are made, heard, and won.

 

Importance of the open outcry method

The open outcry is a method that’s been around for quite some time already and is considered the most effective way of buyer-seller matching. The setting is very personal as traders come face-to-face with each other. With that, each party is given the opportunity to read each other’s body language and incorporate them into their decisions.

 

Hand signals used in open outcry

It is very interesting to note that in order for the matching of buyers and sellers in stock exchanges possible despite all the shouting and yelling, hand signals are being used. Below are some of the hand signals used:

  • The palms of the hands are very important in buying or selling stocks. Whenever a trader wants an offer to buy, the palm of the hands should face towards the buyer.
  • The number of contracts being sold can be indicated using the trader’s fingers. From numbers 1 through 9, the trader touches his chin. When the quantity is in multiples of 10, he touches his forehead. And for multiples of 100, the trader touches his forehead with a fist.
  • The hand signal that is composed of the fist against the palm signifies STOP. It means that there is a stop order because the price’s already reached a specific level, compelling the broker to get the best price for the stock.
  • When a trader places his or her hand across his or her throat, it means that the order’s been CANCELLED or is already OUT.
  • Regarding trading options, traders must indicate whether the option is a call or a put by using their hand. A put is signaled with the hand forming what looks like the ‘OK’ sign while the call is signaled with the hand forming the letter C.

 

Advantages of open outcry

For very important reasons, the open outcry trading method is still used nowadays despite the presence of electronic trading. It offers several advantages, such as:

  • The open outcry method makes it possible for traders to actually see each other and gain access to facial expressions that reveal a lot about the concerned parties. More specifically, traders look out for emotions like greed and fear, something that cannot be seen in electronic trading.
  • The ‘noise’ that is heard and seen in the pit helps traders determine the volatility of the market.
  • The trading market serves as a great experience for new players who want to enter the business. The fun and commotion are always a plus or advantage when working in the actual world.

 

Open outcry vs. Electronic trading

There’s a lot of discussion going on as to the differences between open outcry and electronic trading.

  • Some traders say that electronic trading is better than open outcry because it gives better access to the marketplace, allowing for transparency in terms of the bids and orders. Also, since it is electronic, traders can look into the history of the market from anywhere they are.
  • In terms of the length of time it takes for trading to occur, electronic trading is more time-efficient. What usually takes two to three minutes in the pit trading can be finished in just seconds in electronic trading.
  • Computers don’t steal. Every order, option, or contract is documented and is accessible from wherever one is. Though electronic trading can be subjected to manipulative algorithms, the same can also be said about manipulative traders in the pit.

 

More resources

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • New York Stock Exchange (NYSE)
  • Overweight Stock
  • Six Essential Skills of Master Traders
  • Trading Mechanisms

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