Open outcry (pit trading) is a traditional method of communication between trade representatives on a stock, commodity or futures exchange, which is descended from the nineteenth-century. It involves verbal bids and offers as well as the use of hand signals to transfer trading information in the trading pits-the parts of trading floors where trading takes place. In an open outcry auction, bids and offers must be made out in the open market giving all participants a chance to compete for the order with the best price. A contract is made when one trader shouts out that they want to sell at a certain price and another trader responds that they agree with the same price.
There are many international exchanges who have used the open outcry pattern, like London Metal Exchange, London Stock Exchange, New York Stock Exchange, and American Stock Exchange，as well as the four major exchanges under the CME Group (Chicago Mercantile Exchange & Chicago Board of Trade). However, this pattern has declined in recent decades and the open outcry exchanges have gradually been replaced by electronic trading system due to its own shortcomings and the booming of computers and the internet. The London international financial futures exchange (LIFFE) claimed to switch to electronic trading system., which is the first major exchange abandoned its public outcry around the world. In recent years, major exchanges in Europe and the United States have abandoned or selectively used the open outcry system.
Electronic trading is a method of trading securities, foreign exchange or financial derivatives electronically. Unlike the open outcry system, electronic trading not only removes geographical restraints, but also allows continuous multilateral interaction. Moreover, it is capable of handling much higher volumes of trade. Furthermore, the electronic trading opens up a far wider range of possibilities in the trading process than where open outcry available. Specifically, there is a type of computerized platform or network that called electronic communication network (ECN). It’s used to facilitate the trading of financial products other than traditional open outcry method, and it brings together buyers and sellers of stocks and other securities through an electronic trading platform and network to create virtual market places. Compared to the traditional public outcry trading, the electronic trading system has greatly reduced the transaction costs and improved the trading efficiency and accuracy.
Xing,Y. Stock Index Futures. Guangdong Economic Press, 2002.