During the non-electronic market era more than 10,000 people traded on the floors(US Markets). Later then electronic trading emerged and that made the floor traders to transform and adopt slowly to the Electronic Markets (Computer Based Trading).
At one time, there were only open-outcry exchanges. An open-outcry exchange is a public auction system that involves traders standing in a trading “pit” and calling out prices and quantities that indicate their willingness to buy or sell, so that the information is available to all traders.
Open-outcry traders use hand signals to convey the same information; otherwise, it would be difficult to hear with so many people shouting at the same time. The signals let traders and other floor employees know how much is being bid and asked, how many contracts are at stake, what the expiration months are, the types of orders and the status of the orders.
Open outcry is an efficient means of “price discovery,” allowing purchasers and sellers to arrive at the best prices given the supply and demand for a tradable object.
Hand signals are first adopted by Chicago Mercantile Exchange in the early 1970’s. Hand signals are better and faster than a verbal communication in a noisy trading floor environment. It also provides anonymity to big traders and also traders believed that this methodology is less prone to manipulation. Even though it looks chaotic to people, it’s actually very crystal clear what was going on to the people down on the floor.
Here is a simple video tutorial from CNN about how to use Hand Signals for Buy and Sell Transaction
Floored – Documentary on Floor Traders
This Floored Documentary talks lot about the open outcry and how professional traders behave in the floors and how they taken advantage of the public outcry. As the floor trading era is over, many traders find difficult to adapt to computer based trading and even the floor traders feared of Computer based algorithms eating their edge.
It is a must watch video for any professional trader not only to understand the hand signals but also to understand how the public outcry functions.