open outcry

Open outcry is the system of floor trading historically used in stock exchanges, although most of the major exchanges in the world markets are now electronic.

Technically, the meaning of open outcry is that your bid or offer is good 'while the breath is warm'. What this actually means is that each trader on the exchange will shout out what trade he is trying to execute. He is not able to just shout it once and assume everyone has heard him, he must keep shouting. If he stops shouting, it is assumed that he no longer wishes to trade at that price level.

Everyone around him is also shouting, resulting in a lot of noise, and not much clarity. The consequence of this is that not only do traders have to shout continuously what trades they are trying to fill, they must also hand signal their trades, in case a trader in the distance cannot hear clearly. The hands and the mouth must say the same thing. Traders cannot just trade with hand signals, and they must take examinations to comply with he requirements of the respective exchanges.

+-------+       +----------+    +-------+
| Buyer |       | Clearing |    | Seller|
+-------+       |   house  |    +-------+
  |  ^          +----------+      ^  | 
  V  |            ^     ^         |  V
+-------+         |     |       +-------+
| Member|---------+     +-------| Member|
|  firm |                       |  firm |
+-------+                       +-------+
  | ^           ________           ^ |
  order        /        \          order
  | |  _______/   Pit    \_______  | |
  | +-- Floor |          | Floor --+ |
  +--->Broker | bid/ask  | Broker<---+
       _______|  trade   |_______
              \ executed /
               \________/
               |  Pit   |
               |reporter|
               ----------
                   |
  Quotation        V          Ticker
    boards <================> Network
                  

Sequence of execution of a trade

Source: Chicago Mercantile Exchange

1. A customer's order is sent by a member firm to the trading floor by telephone.
2. The order, when received by the firm's on-floor desk is time stamped.
3. The order is signalled to the appropriate trading pit, or carried there by a gold-jacketed runner who gives it to a broker for execution.
4. When the order is filled, the floor broker endorses its time, price and quantity.
5. A blue-jacketed observer enters the price into the computerized price reporting system. This information is then transmitted to market participants around the world.
6. Once executed, the order is returned, by a runner, to the member firm, where it is again time stamped. The order is then confirmed back to the customer.

Hand signals

• buy - Both hands raised, palms towards body.
• sell - Both hands raised, palms facing away from body.
• price - Left hand raised, arm straight. Fingers indicate price
• quantity - Left hand raised, arm bent. Fingers indicate quantity.