Pit

Posted in Finance, Accounting and Economics Terms, Total Reads: 280
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Definition: Pit

Instead on electronic trading on exchange, another method of trading is to trade at floors. Open outcry is a mode of communication between investors and brokers on stock or future exchange. It involves hand signaling or shouting to communicate about buy or sell orders. The part of trading floor, generally octagon in shape, is called a pit.


The investor would go to the broker to place an order, the broker in turn will call his clerk down on floor/pit to execute the order and get back with confirmation. Runners transmit order between clerk at pit and the brokers. Brokers show their affiliation through their badges and jacket colors. The order is processed and communicated by fanatic process of open outcry. The brokers and traders constantly bid and offer prices. This free market system leads to optimum price, price that is perceived by the market as true price and hence the process is called" price discovery". The old school thought is that pit trading leads to efficient price discovery as a result of pressure of supply and demand.


In pit trading, hand signal and vocal open outcry are ways to communicate quantity and price information. They facilitate a quick way of being heard above the crowd.

• Palm in means an offer to buy

• Palm facing away from hand, sell order.

• Hand away and in front of body means show price

• Hand touching or near face shows quantity. Touching forehead and hand sideways means buy 70 contracts.

 

The words of traders are a bond. With million dollars at stake, each action in the pit is recorded and executed trade agreement. Though seemingly chaotic, inside the pit the traders conduct business at lightning speed. Similar to electronic exchange, the prices in pit move rapidly and every second make a lot of difference in the amount of money gained or lost. Thus speed of execution and order delivery is extremely important.

 

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