When a customer places an order with his broker, the broker phones (or uses an order routing system to inform) the firm’s trading desk on the exchange floor, who then relays the order to the firm’s traders in a trading pit where the contract trade. At the trading pit, hand signals and verbal activity are used to place bids and make offers. This process is called open outcry.
The concept of open outcry arose from the early days of trading through auction and is a 140-year tradition. Traders stand in designated areas, called “trading pits,” on the trading floor. Every trader in the pit is an “auctioneer.” Each trader announces his own bids and offers. Special hand signals indicating buying or selling, price, and quantity are used.
In the open outcry system, there is a wellestablished system underlying an outward appearance of apparent chaos. In this system, only the “best” bid and offer are allowed to surface in the trading pit. For example, if a trader is willing to pay a higher price, he or she will announce the bid, silencing bids that are lower.
Further, when a trader announces a bid, he or she states the price first and the quantity next, such as 98.35 (price) on 2 (quantity). For an offer, quantity is stated first followed by price, such as 1 (quantity) at 98.36 (price).
While the open outcry process is slowly becoming outdated, it is used in the United States and some exchanges overseas like the Singapore Exchange. Most futures exchanges outside the United States use a fully automated system when orders are submitted through a computer and executed of the trading floor.