Hand signals

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Communication in open outcry trading pits takes place through a complex set of hand signals, in addition to the use of verbal bids and offers. Because of the noise in the crowded pits, traders have traditionally used hand signals to convey the same information they convey orally. The signals denote whether a trader wants to buy or sell, and also convey price and quantity.

A trader who is buying turns his palms facing inward, and a trader who is selling turns his palms outward, away from the body. Signaling in front of and away from the body indicates price, while signaling near the face indicates quantity.[1]

History

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The history of trading floor hand signals is said to begin around the middle of the 19th century. Brokers and traders found themselves unable to reconcile the distance between their personal staffs working in offices high above the pit and the pit itself. Facing increasing competition for real estate on the trading floor, fights broke out over positions in the pit which afforded better views. Some brokers even began looking into hiring exceptionally tall men, to gain the literal advantage of foresight.

To combat the problems, a number of systems began coming into place to pass information quickly and directly to a trader on the floor without revealing the information to all, including note-passing and hand signals. Over the years, hand signals won out as the favored method. Eventually, all orders were to be passed through market specialists, and a universal language of hand signals emerged. [2]

In the photo to the right, traders in Singapore use hand signals to communicate.

Hand Signals Becoming Thing of the Past Due to Electronic Trade

However, hand signals used in open outcry trading are quickly becoming a thing of the past on many exchanges that are becoming increasingly electronic. New securities, options and futures exchanges being created have gone straight to electronic trading, totally bypassing the open-outcry alternative. Open outcry exchanges have moved much of their trading to "the screen," leaving fewer products to trade in pits or rings. This has several practical implications. It is much simpler to "try out" any number of new products ("put them up electronically") to see if they succeed.

Previously, new products required pits or rings to be constructed, a fairly expensive proposition for a new product should it not succeed. Without the reliance on pits or rings, real estate issues for an exchange trading floor become a non-issue. As one example, consider the CME trading floors at 20 South Wacker Drive. The lower CME trading floor can accommodate up to 4,300 people at one time, while the upper floor can accommodate 2,300. [3]

What once was a bustling atmosphere of traders using hands signals to buy and sell in trading pits, along with a trading floor staff who support open outcry trading, today is a mere shadow of past years, except in a few isolated pits where trading ranges from very active to almost moribund. Thus, trading floors become an expensive real estate proposition as electronic trading overtakes open outcry.

Even more important is the fact that electronically traded products, versus open outcry products, can be traded virtually around the clock during the business week, allowing global access during participants' trading hours no matter their time zone.

Hand signals used by floor traders, one of the most colorful pieces of this interactive business, are now the exception rather than the rule.

In the Media

The U.S. Public Broadcasting System, as part of a special on open outcry trading, put together a feature on using hand signals which is available here: http://www.pbs.org/itvs/openoutcry/trading2.html

References

  1. Infographic: Trader's Guide to Open Outcry Hand Signals. CME Group.
  2. Hand Signals On The Trading Floor. The Everything Development Company.
  3. "Intro to Futures & Options Manual": How Many People Work on the Trading Floor?” p. 27. www.cmegroup.com.