Open Outcry
Open outcry is the traditional method of executing trades on a physical exchange floor, where traders and brokers verbally shout bids and offers and use hand signals to communicate trade interest, with transactions completed through direct face-to-face negotiation in a 'pit' or 'ring.' It has largely been supplanted by electronic trading systems.
Key takeaways
- Open outcry was the dominant trading mechanism for futures and options exchanges until the late 1990s and 2000s.
- The 'pit' structure allowed for price discovery through public, transparent competition among multiple participants simultaneously.
- Specialized hand signals allowed traders to communicate price, quantity, buy or sell direction, and option expiry across noisy trading floors.
- Open outcry favored local floor traders and pit brokers who had speed and information advantages over off-floor participants.
- The transition to electronic trading dramatically reduced bid-ask spreads and increased market access, but reduced price transparency in some complex derivatives markets.
Explanation
Open outcry was the defining mechanism of organized commodity and derivatives exchanges from the Chicago Board of Trade (founded 1848) through the late 20th century. In an open outcry exchange, trading occurs in a physical 'pit' — a tiered octagonal arena where traders gather to execute transactions by verbally announcing bids and offers and confirming trades through hand signals and eye contact. The process is inherently public: any participant in or near the pit can hear all bids and offers, creating price discovery through simultaneous, competitive participation.
The mechanics of open outcry required traders to develop a sophisticated language of hand signals that conveyed complete trade information rapidly and without ambiguity. Pointing a finger toward oneself indicated a buy; pointing outward indicated a sell. Numbers were communicated through finger positions: one finger pointed upward meant one contract, while a palm facing outward indicated five contracts. Option traders added additional signals for strike prices and expiry dates. This system allowed experienced traders to execute transactions in seconds — critical when prices could change multiple times per minute during volatile markets.
Open outcry favored a specific type of participant — the local floor trader — who could execute trades on their own account with speed and positional advantages unavailable to off-floor participants. Locals provided essential liquidity in the pits by continuously making markets, but they also extracted rents through informational advantages: observing the order flow, reading the body language of large broker-dealers, and positioning ahead of anticipated institutional orders. This practice — while largely legal within the rules — contributed to the higher execution costs faced by off-floor participants.
The CME Group's Globex electronic trading platform, launched in 1992, initially handled only overnight sessions while pits remained active during regular trading hours. By the mid-2000s, electronic volume had surpassed open outcry volume for most futures contracts as execution speed, round-the-clock access, and dramatically lower transaction costs attracted institutional and algorithmic traders. The CME Group closed the majority of its trading pits in 2015, marking the effective end of open outcry for most futures markets. Some options pits — particularly at CBOE for equity index options — retained open outcry longer due to the complex, multi-leg nature of options strategies that human traders negotiated more flexibly than early algorithmic systems.
Dark pools and alternative trading systems represent the modern analog to certain aspects of open outcry: they provide a venue where large institutional orders can be matched with natural counterparty interest away from the public market, reducing market impact. However, the transparency of open outcry — where all participants could observe the competitive price discovery process — is absent in dark pools, representing a different set of microstructure trade-offs.
Example
On the Chicago Mercantile Exchange floor in the early 2000s, a large commodity trading firm needs to execute 500 S&P 500 futures contracts for a client. The firm's floor broker enters the S&P 500 futures pit and, using hand signals and verbal bids, begins working the order: buying 50 contracts at a time to minimize market impact, competing with several locals who are simultaneously making bids and offers. The entire 500-lot order is filled in approximately 4 minutes at an average price of $1,124.75, with the best single-lot execution at $1,124.50 and the worst at $1,125.25 — a range of 0.75 index points ($37.50 per contract). The same order executed electronically in 2023 on Globex with a TWAP algorithm over 15 minutes would typically achieve 2–3 times lower market impact due to better order segmentation and anonymity.
Related terms
Banging The Close Board Of Trade Dark Pool Electronic Trading Equity Equity Index Exchange Floor Floor Broker Floor Trader Liquidity Market Impact