Open Outcry

Open outcry is the original, high-energy method of trading financial instruments. Picture a packed room of traders in colorful jackets, shouting, waving, and using a complex system of hand signals to buy and sell assets. This chaotic but organized dance took place in a designated area on a trading floor, famously known as the ‘pit’. Here, traders would publicly shout their bids (offers to buy) and asks (offers to sell), creating a transparent and dynamic marketplace. This human-powered system was the heart of major exchanges like the Chicago Board of Trade (CBOT) and the New York Stock Exchange (NYSE) for over a century. While now almost entirely replaced by the silent hum of computer servers, open outcry remains an iconic symbol of the raw, competitive spirit of the financial markets. It was a system built on face-to-face interaction, where a trader's word and reputation were their bond.

The pit was a masterpiece of organized chaos. It was typically an octagonal, tiered structure, allowing participants to see each other clearly. The system worked through a unique combination of voice and gestures, ensuring communication was possible over the roar of the crowd.

• The Players: Two main types of people populated the pit.
  1. Brokers executed trades on behalf of clients (like pension funds or individuals). They wore jackets of a specific color to identify the firm they worked for.
  2. Locals, or proprietary traders, traded with their own money, providing liquidity to the market by taking the other side of brokers' trades.
• The Language: To be understood in the pit, traders used a standardized system.
  1. Voice: A trader would shout the quantity and price. For example, “Buying 50 at 90!”
  2. Hand Signals: This was the crucial part. Gestures conveyed the most important information instantly and across the pit.
     1. Buy or Sell: Palms facing toward the body meant “I want to buy.” Palms facing away from the body meant “I want to sell.”
     2. Price: Fingers held vertically indicated the last digits of the price.
     3. Quantity: Fingers held horizontally showed the number of contracts or shares being traded.

When a buyer and seller agreed on a price and quantity, they would make eye contact, nod, and record the trade on small paper slips. This constant negotiation ensured real-time price discovery, establishing the fair market value for assets like commodities, futures contracts, and options.

As a value investor, you’re focused on a company’s long-term intrinsic worth, not the frantic minute-by-minute price swings of the market. So why should you care about this old-school trading method? Because the open outcry pit is the most vivid illustration of what Benjamin Graham, the father of value investing, called “Mr. Market.” Mr. Market is your imaginary, manic-depressive business partner who shows up every day offering to buy your shares or sell you his. Some days he is euphoric and offers ridiculously high prices; other days he is despondent and offers to sell at a huge discount. The pit was Mr. Market in the flesh. It was a sea of human emotion—fear, greed, panic, and elation—all on public display. Understanding this helps a value investor in several ways:

• Emotional Discipline: Witnessing the pit’s hysteria is a powerful reminder to remain rational and detached. Your job is not to get caught up in the shouting match but to calmly assess the underlying value of the business and act only when the price offered makes sense.
• Appreciating Liquidity: The pit shows how a market needs willing buyers and sellers to function. The ‘locals’ provided that liquidity, ensuring you could almost always buy or sell. In today's electronic markets, this role is played by algorithms and high-frequency trading (HFT) firms, a very different (and less visible) dynamic.
• Human Factor: Open outcry reminds us that markets, even today's electronic ones, are ultimately driven by human decisions and psychology. The technology has changed, but the underlying emotions of fear and greed have not.

The roar of the trading pit has faded into history, replaced by the speed and efficiency of electronic trading. By the early 2000s, most exchanges had transitioned to screen-based systems. The CME Group, which includes the CBOT, officially closed most of its futures pits in 2015, marking the end of an era. The shift was inevitable. Electronic trading is faster, cheaper, and provides access to global markets 24/7. However, something was also lost. Proponents of open outcry argue that human traders could better absorb and manage market volatility, especially during unexpected crises. A person could spot a “fat finger” error or a nonsensical order in a way a machine might not. The pit’s transparency was visual; you could see the order flow. Today, that flow is hidden within fiber-optic cables, making the market feel more abstract and opaque to the average person. While a few options pits on the NYSE floor remain, they are a shadow of their former selves. Open outcry is now less a functional trading system and more a piece of living history—a noisy, colorful reminder of the human foundation upon which our modern financial world was built.