What it is:
Open outcry is a trading mechanism that uses verbal bids and offers. It is usually conducted in trading pits on futures and options exchanges.
How it works/Example:
Open outcry is not just vocal. It involves a series of hand signals that are necessary to communicate over the din of the yelling. Much of the yelling is trading jargon associated with communicating how many contracts are for sale or sought for purchase and at what price. The pace is fast and the environment is chaotic, though the process is methodical and structured to ensure that the best bids and asks are made obv
Why it matters:
Open outcry is the original and, some would say, the best method for matching buyers and sellers. It allows buyers and sellers to see each other face-to-face, which lets them incorporate information based on the other party's facial and body language into their decisions. Considering that price changes often stem from only two emotions (fear and greed), many traders prefer the open outcry system.
Despite the assumption that open outcry systems must be less efficient and more costly than fully electronic trading systems, many argue that they are as efficient as their computerized counterparts. In addition, some believe that open outcry can prevent collusion because literally any trader can enter a market and take advantage of wide spreads; this is often not the case for electronic trading systems whereby a small number of large market makers could keep spreads wider than necessary.