Want to know about the Open Outcry Method? Open Outcry trading system was very popular for carrying trade orders in trading pits before the introduction of E-trading.
The use of hand signals and verbal communication for conveying trading information of stocks, futures exchanges, and options by traders in the trading pit is now rarely employed. This approach has replaced with faster and more convenient electronic order systems.
The open outcry trading method takes place on the trading floor, where contracts are made by the traders between buyers and sellers of financial securities who agreed on executing a trade at a specific price.
How Does Trading Done Via Open Outcry Floor Trading?
Open outcry trading takes 4 steps from finding prospects to successfully execution of a trade. These steps are as follows:
- Bidding and Offering
- Creation of Informal Contract
- Recording of the Deal
- Agreement and Concession of the Deal
Let us understand each and every step that takes place in the open outcry trading process in detail.
➤ Bidding and Offering
In open outcry methods, traders pick the following communication methods for trading –
a. Verbally Shouting offers and bids
b. Waves arms to get attention to trader’s offers and bids
c. Via. signals of hand
The flow of marketing trade is very volatile in the early and the closing period i.e., opening & closing time of the market or when the release of key economic reports gets outs. Broker when approaching the pit with an order to make is met by traders who start shouting to grab potential broker’s attention even before getting an order.
It then works according to the level. Since brokers are the only ones at the top of the pit, hence they get a clear view of the runner. So, if brokers become active then it is mostly an act based on facts. Then comes traders, they also spur some activity because they are at the center of the pit and know insiders news and they are the first ones to be notified of the significant changes and act accordingly, resulting in heavy activity throughout the pit.
To deal with this level of volatility, a popular strategy is picked up among floor traders is to pay attention to certain other traders and forget the rest. For example, there are two traders – trader “A” from one firm and trader “b” from another. They both have a good understanding. Now whenever trader “A” wishes to sell shares, trader “b” will mostly be up for buying the shares. So, instead of shouting offers in the pit to all traders, one can directly look up to another trader and indicating the no. of shares one looking up to sell.
➤ Creation of Informal Contract
A contract in which a trader announces to sell an asset to another one at a specific price and the buyer (another trader) also agrees to purchase those assets at that price. Due to being an informal contract, it is condemning to follow the agreement by traders. If for instance, the trader revokes the agreement made in the pit on buying the lot of U.S. Bonds at the end of the day – This single even could bring disruption in the entire bond market.
➤ Recording of the Deal
Both traders record the deal separately irrespectively of the distance they are standing away from each other while making a deal.
➤ Agreement and Concession of the Deal
Once the deal has been successfully confirmed by both parties. Then each one of them needs to clear the side of the deal in member reports to the clearinghouse. Then clearinghouse matches the deal made among the traders until then both sides bear Non-Comparison risk. If the deal is matched then each trader acknowledged the other’s claim on the other. If not then that deal is declared as “out trade”.
An out trade occurs generally due to the following reasons:
a. misunderstanding between the traders and,
b. reporting error made by traders, clerks, keypunch operators, etc.
Resolving out trade is expensive mostly but they are generally sorted in a timely manner, before the beginning of next day trading. Until the trade is successfully accepted, both traders have rights against each other which are debatable. That’s why most traders like to trade with those traders only with whom they have long-term relationships and they can trust.