Background
Open outcry is a method of communication between professionals on a stock exchange or futures exchange. Traders use verbal bids and offers to communicate buy and sell orders through shouting and the use of hand signals. This system has been mainly used in trading pits on exchanges such as the New York Stock Exchange (NYSE) and the Chicago Mercantile Exchange (CME).
Historical Context
Open outcry has been in existence for centuries, evolving as public forms of auction, starting from simple town square auctions to the dynamic trading pits of the 20th century. Notably, it took center stage during the industrial and financial booms of the 1800s and 1900s when stock and commodity exchanges played pivotal roles in economic activities.
Definitions and Concepts
Open outcry refers explicitly to the audible and visible exchange of buy and sell orders. Its aim is to ensure transparency and that all market participants have equal access to trading information, maintaining market integrity.
Major Analytical Frameworks
Classical Economics
Classical economics put forth ideas about markets achieving equilibrium naturally without external interference. Open outcry can be seen as an infrastructure supporting this idea by providing a transparent method for competitive bidding.
Neoclassical Economics
Neoclassical theory focuses on the role of supply, demand, and utility. Open outcry aids in discovering the true market price through open competition and instantaneous negotiations between buyers and sellers.
Keynesian Economics
Keynesian theorists might analyze open outcry in terms of market confidence and liquidity, essential for meeting aggregate demand and stabilizing the economy.
Marxian Economics
From a Marxian perspective, open outcry could be scrutinized for its role in maximizing profits and its accessibility regarding which types of traders or financiers can participate in such transparent auctions.
Institutional Economics
Highlighting the importance of rules, norms, and institutions, open outcry exemplifies institutionalization within trading practices, maintaining order and trust in the trading environment.
Behavioral Economics
Behaviorally, the dynamic visuals and sounds in an open outcry pit can impact trader psychology, potentially leading to herd behavior or irrational exuberance.
Post-Keynesian Economics
Post-Keynesian thought may appraise how open outcry contributes to financial stability or instability, investigating the system’s effectiveness during different macroeconomic cycles.
Austrian Economics
Focuses on individual actions and market processes, and would appreciate the open outcry for enabling real-time price signals and spontaneous order driven by trader interactions.
Development Economics
In the context of developmental studies, open outcry markets in emerging economies might play a crucial role in price discovery and liquidity for local agriculture and primary commodities.
Monetarism
Would evaluate open outcry in terms of its effect on the velocity of money and the effectiveness of the market in responding swiftly to new economic data.
Comparative Analysis
Compared to electronic trading, open outcry provides more human factors into the trading equation but is limited in speed and efficiency. Critics argue that electronic methods surpass open outcry by providing instant information and broader access, yet proponents argue it offers unmatched immediacy and personal judgment.
Case Studies
- The New York Stock Exchange (NYSE) used open outcry prominently until the early 2000s.
- Chicago Mercantile Exchange (CME) continued to use open outcry for futures and options trading until the mid-2010s.
Suggested Books for Further Studies
- “Reminiscences of a Stock Operator” by Edwin Lefèvre
- “Liar’s Poker” by Michael Lewis
- “The New Financial Capitalists” by George P. Baker and George Gaidos
Related Terms with Definitions
- Electronic Trading: A method of trading securities and currencies electronically without the use of verbal bids or offers, typically via computer networks.
- Auction Market: A market where buyers enter competitive bids and sellers enter competitive offers.
- Liquidity: The ease with which an asset can be converted into cash without affecting its market price.
- Price Discovery: The process through which market prices are determined.
- Trading Pit: A specific area in an exchange where open outcry transactions are conducted.
