Open Outcry Research Articles

Procedural Fairness in Exchange Matching Systems.

The move from open outcry to electronic trading added another responsibility to futures exchanges-that of matching orders between buyers and sellers. Matching systems can affect the level and speed of price discovery, the distribution of revenue, as well as the level of price efficiency of a given market. Whether the matching system is procedurally fair is another important consideration. I argue that while FIFO (First In First Out) is a fair procedure in principle and is perceived as the default matching system, it is not a fair procedure in practice. Likewise, while pro rata is a fair procedure in principle, it is not so in practice. Nevertheless, both FIFO and pro rata are relics of an open outcry system. Instead, I propose an alternative approach to matching systems that builds on the strengths of electronic trading-the ability to randomize in real time. I introduce random selection for service (RSS) as a matching system that is procedurally fair both in principle and in practice.

LIQUIDITY OF FUTURES MARKETS OVER THE LAST QUARTER OF A CENTURY: TECHNOLOGY & MARKET STRUCTURE VERSUS ECONOMIC INFLUENCES

This study examines the major technological and market forces that have acted on the liquidity of futures markets over almost the last quarter of a century – equivalent to Professor Robert Webb’s tenor as Editor-in-Chief at the Journal of Futures Markets. We examine the impact of electronic trading replacing open outcry, the impact of high-frequency trading and co-located trading, compare the liquidity impacts of these developments with the impact of major economic events, including the Global Financial Crisis and Covid-19 Pandemic. Using a stock index futures contract traded on Australian futures exchanges as an example, we find that technological advances have had a statistically significant but almost imperceptible influence on measures of liquidity of Australian futures contracts. In contrast, economic crises, and crashes such as the Global Financial Crash and the Covid-19 crash have had a massive and sustained impact on the liquidity of futures markets. Our results suggest that liquidity effects from technological innovations, while important, remain dwarfed by those from extreme outlier events.

Determinants of Ethiopian Commodity Exchange Participants Membership Category

Purpose: The Ethiopian Commodity Exchange (ECX) was established to revolutionize Ethiopian agriculture and transform the economy through introducing a dynamic, efficient and transparent marketing system. Properly implemented and regulated, commodity exchanges can contribute greatly to the achievement of a country’s economic and developmental goals and strengthen the bargaining power of participants. Hence the overall objective of this study is to assess the trading practices and challenges of the newly established commodity exchange in Ethiopian. Design/Methodology/Approach: The study adopted a descriptive cross-sectional research design . Using a structured questionnaire survey by interviewing a sample of 80 randomly selected participants an analyzed using both descriptive and inferential data analysis techniques. F indings: The study found that practicing an open outcry and spot contract trading system. Results of the econometric-model analysis revealed that time of participation, limited membership seat, membership seat fee and occupation were found to be significant predictors that influence the choice of membership category. Result of the study also indicated that lack of adequate warehouses, grading and sampling system, higher penalty cost related to warehouse service, availability of in-store credit, higher membership seat fee and transaction cost, were found to be some of constraints that hinder participants from the smooth functioning of transactions in the exchange. Originality/value: This study is important especially to policymakers and development practitioners to make informed decisions in an effort to transform the economy through strengthening transparent marketing system in the country. In this regard, this study provides valuable information and evidence on the performance and challenges of ECX. Keywords: ECX, ECX participants, trading practice, quality grading system, market information system DOI: 10.7176/RJFA/11-17-04 Publication date: September 30 th 2020

Trading Options and the Unattainable Dream: Some Reflections on Semiotic Ideologies

Over the last few decades there has been a miniature industrial revolution in the buying and selling of securities on capital and derivatives markets. Whereas most trading once happened in open outcry pits or over the phone, trading now occurs primarly via electronic limit order books. Whereas once traders could have little education and find work as a consequence of membership in a local insular network, new financial hires are now the most talented graduates of PhD and master’s programs in the hard sciences and mathematics. Even though these circumstances are well attested, knowing is not enough for some to become this new kind of trader. I suggest that the theory of semiotic ideologies—that is, what grounding assumptions people bring to the process of interpreting signs—can be used to illustrate boundary cases of social change in which people are simply unable to learn enough to adapt to new circumstances in their lives. I will show that even though traders can adopt the appropriate semiotic ideology of markets that their times demand, some of them will never be skilled enough to fully participate. This, in turn, has to do with the nature of change in a capitalist economic system.

Open outcry versus electronic trading: Tests of market efficiency on crude palm oil futures

Given the widespread transfer of trading to electronic platforms we ask whether such trading is more efficient than open outcry. Examining the Crude Palm Oil (CPO) market from 1995:06 to 2008:07, our findings, derived from a novel threshold autoregressive relative efficiency measure, are that efficiency is conditional on: (i) volatility; (ii) the maturity of the futures contract; and (iii) the market trading system. Specifically, when volatility is high, open outcry is superior for shorter maturities and electronic trading for longer maturities. These results suggest an efficiency skew and that there may be benefits to the coexistence of trading mechanisms.

Bund for Glory, or It's a Long Way to Tip a Market

Journal of Applied Corporate FinanceVolume 27, Issue 4 p. 81-87 Original Articles Bund for Glory, or It's a Long Way to Tip a Market Craig Pirrong, Craig Pirrong CRAIG PIRRONG is Professor of Finance at the University of Houston's Bauer College of Business.Search for more papers by this author Craig Pirrong, Craig Pirrong CRAIG PIRRONG is Professor of Finance at the University of Houston's Bauer College of Business.Search for more papers by this author First published: 28 January 2016 https://doi.org/10.1111/jacf.12149AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Volume27, Issue4Fall 2015Pages 81-87 RelatedInformation

Secret versus public reserve price in an “outcry” English procurement auction: Experimental results

In a set of human experiments, we analyze the impact of the buyer׳s reserve price policy in an online open outcry reverse auction. We measure the impact of revealing or not the reserve price on the buyer׳s expected cost when suppliers may be risk-averse. Results confirm that the optimal public reserve price policy dominates for the buyer when the lowest cost supplier is weakly risk-averse but in contrast with theory, the secret reserve price policy does not dominate when he becomes very risk-averse. Analysis of strategic suppliers׳ bidding behavior shows, in conformity with theory, that they react to the secret reserve price and are more aggressive when they are more risk-averse. This explains why the optimal public reserve price does not perform better in this context but is equivalent to the secret one. However, strongly risk-averse bidders are less aggressive than predicted by theory. That is why the secret reserve price policy does not strictly dominate.

The Role of Undisclosed Reserves in English Open Outcry Auctions

This study considers the role that reserve prices may play in residential property auctions. In comparison to much of the previous empirical work, this study has access to undisclosed reserve prices from English auctions. Consistent with theoretical arguments in the auction literature, the results obtained illustrate that while higher reserve prices increase the revenue obtained for the seller, they also reduce the probability of sale. The findings also highlight the importance of auction participation, with the number of individual bidders and the number of bids significant in most specifications.

Technology and Learning: Automating Odd-Lot Trading at the New York Stock Exchange, 1958–1976

This study analyzes how embedded beliefs about the proper ordering of financial market activities shaped the automation of the New York Stock Exchange (NYSE) during the period, 1958 to 1976. Specifically, it focuses on how technological innovation led to the unanticipated eclipse of its odd-lot dealer function, a unique niche for handling nonstandard trades of less than 100 shares. The decision to automate through computerization initially responded to a powerful cluster of managerial, governmental, and market imperatives. In automating, a high priority was given to the preservation of the NYSE’s traditional trading model—the open outcry auction system—whose defining features dated back to the late nineteenth century. This experience illustrates how unforeseen economic consequences relating to technological adoption may adversely affect significant constituencies within a business network.

Intraday Trading and Bid–Ask Spread Characteristics for SPX and SPY Options

With intraday financial data increasingly available, we are now able to explore the microstructure of trading in detail. One feature that is typically seen in intraday stock returns is a clear U-shaped pattern of trading activity: a lot of action after the opening and at the close, with a lower amount around the midday lunch hour. Such patterns are found for various trading measures, including volume, bid–ask spreads, and volatility. Options markets may or may not exhibit a similar pattern as their underlying stocks; evidence is sparse and shows differing results for different markets. Mishra and Daigler find the intraday trading patterns for two closely related index options are quite different. SPX options are written on the S&P 500 index and are traded at the CBOE both electronically and by open outcry. SPY options are written on the SPDR exchange traded fund, which is designed to replicate the daily returns on the S&P 500. The SPDR ETF is traded electronically on many trading platforms. SPX options are traded in large size by financial firms and individuals, whereas SPY options seem to appeal more to the retail trader. As with stocks, SPY options show the U-shaped pattern, whereas it is not found with the SPX. An interesting comparison between the calm environment of 2007 and the market turmoil in 2008 reveals that while trading volume for SPY contracts shot up in the crisis, volume for SPX contracts did not.

Trading commodities and financial futures: a step-by-step guide to mastering the markets

Acknowledgments. Preface. Introduction. 1. Basic Training: A Futures Primer. Futures markets and the futures contract. It is as easy to sell short as to buy long. Margin and leverage. Delivery months. Brokers and commissions. The players. A hedging example. The Exchange, 'open outcry' and the clearinghouse. The regulators and regulations. How to place an order. Conclusion. 2. The Intermediate Futures Trading Course. Zero sum game. Money management. Contrary opinion theory. Spreads, straddles, and switches. Carrying charges. Normal or inverted? The Voice from the Tomb. 3. A diabolical story. 4. The Options Primer. What is an option? How options work. 5. Advanced Option Strategies. Buying options to protect futures. Writing options as a hedging strategy. Covered option writing. Option spreads. Straddles and strangles. Butterfly spreads. Ratios. 6. Eight Winning Option Trading Rules. 1. Stay away from deep in-the-money options. 2. Stay away from deep out-of-the-money options. 3. -Trade slightly out-of-the-money, at-the-money, or slightly in-the-money options. 4. There is a time for all seasons. 5. Covered call writing is a good strategy for what appears to be a bullish environment, and covered put writing is generally good for what looks like the bear. 6. In normal markets, write straddles and strangles. 7. Look for opportunities to backspread. 8. Use options to hedge a profitable futures position. 7. How to Analyze the Markets Fundamentally. Fundamental analysis. Technical analysis Which is the best way to go? Financial futures. Currencies. Energy. Agricultures. Meats. Metals. 8. The Advanced Futures Trading Course. Does technical analysis really work? Charts. Gaps. Open interest. Point and figure charts. Japanese candlestick charts. Spread trading-a valuable forecasting tool. Why technical analysis makes sense. 9. The Most Valuable Technical Tool [TMVTT]. Bottom pickers versus trend followers. A moving picture. A moving average primer. The simple moving average. How many days should you use in your moving average? Bottom line. 10. How I use TMVTT. Step 1. Step 2. Additional rules for maximum success. 11. Day Trader's Secrets. Your nine essential day trader's rules. The trend reversal day trading system. 12. Your 'State of Mind'. Motive. Six hurdles to successful trading. Money management. If you don't feel right, you won't trade right. Your advantage. 13. 25 Trading Secrets of the Pros. Secret 1. Secret 2. Secret 3. Secret 4. Secret 5. Secret 6. Secret 7. Secret 8. Secret 9. Secret 10. Secret 11. Secret 12. Secret 13. Secret 14. Secret 15. Secret 16. Secret 17. Secret 18. Secret 19. Secret 20. Secret 21. Secret 22. Secret 23. Secret 24. Secret 25. 14. Jesse's Secret. The secret to making the big money is to maximize the big move. Jesse Livermore. Those who can be right and sit tight. Appendix. Index.

Discovering the ecosystem of an electronic financial market with a dynamic machine-learning method1

Not long ago securities were traded by human traders in face-to-face markets. The ecosystem of an open outcry market was well-known, visible to a human eye, and rigidly prescribed. Now trading is increasingly done in anonymous electronic markets where traders do not have designated functions or mandatory roles. In fact, the traders themselves have been replaced by algorithms (machines) operating with little or no human oversight. While the process of electronic trading is not visible to a human eye, machine-learning methods have been developed to recognize persistent patterns in the data. In this study, we develop a dynamic machine-learning method that designates traders in an anonymous electronic market into five persistent categories: high frequency traders, market makers, opportunistic traders, fundamental traders, and small traders. Our method extends a plaid clustering technique with a smoothing framework that filters out transient patterns. The method is fast, robust, and suitable for a discovering trading ecosystems in a large number of electronic markets.

Return Dynamics and Trading Strategy in Alternative Trading Systems

This article examines intra-day price relationships between electronic and floor (pit) trading markets for the S&amp;P 500 and Nasdaq 100 equity index futures. The two contracts trade in dual open outcry and electronic platforms during non-overlapping trading hours. The results indicate that closing transactions on the electronic market have a systematically negative influence on the opening prices established on the pit. In contrast, pit prices at the end of the regular trading have a positive, but less pronounced impact on the opening prices established in the electronic exchange. Based on this relationship, we document a profitable high-frequency trading strategy that can only be partly explained by macroeconomic news. <b>TOPICS:</b>Exchanges/markets/clearinghouses, portfolio construction, statistical methods

Trader Survival: Evidence from the Energy Futures Markets

This study analyzes the adaptation of traders and the determinants of trader survival during a period of changing market structures. Our unique sample of transactions level data covers the introduction of electronic trading in the NYMEX energy futures market. The results show that most floor traders adapted to the side‐by‐side electronic and open outcry trading, although trader attrition increased and the profitability of surviving traders declined dramatically. It is also found that trading profits, trader experience and sophistication, and dual trading have a positive effect on the probability of trader survival. Scalpers are less likely to exit trading in pure open outcry trading, but are more likely to fail than traders who hold open positions longer in side‐by‐side trading. Finally, traders trading in multiple energy futures markets and those who use both the exchange floor and electronic trading appear to have a survival advantage in side‐by‐side trading. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark 32:809–836, 2012

A few useful considerations in the development of intra-day trading software

Trading has evolved from being merely an "open outcry" to becoming tech-savvy and computer intensive. With the stock exchanges computerizing the trading procedures and the traders following suit there was a need felt to upgrade the trading systems in sync with the innovational changes in technology like ECN (Electronic Communication Network) and SOES (Short Order Execution System). In their quest for maximizing gains while reducing risk and brokerage, trading companies fell over the idea of using computers for latency based arbitrage in an intra-day trading setup. It became quite empirical that better machinery meant more profits. The present paper realizes that for a vendor to develop the most efficient intra-day trading systems, it is necessary to incorporate various software standards that are otherwise of very little concern in other domains. This paper focuses on how the Indian software industry can put their clients at an advantage by adopting certain strategies which are a general feature of their western counterparts. Hence it is attempted to compare how the Indian trading software lag behind the internationally accepted software and how these shortcomings can be overcome.

Derivatives pricing and liquidity dominance in alternative trading venues

This study examines the quality of derivatives pricing in the market in which liquidity is dominated by an alternative market. We use US interest rate futures from the side-by-side open outcry and electronic markets, in which electronic markets dominate liquidity. We find that the bid-ask spreads in illiquid open outcry markets have increased substantially since electronic markets became a major part of the market liquidity. Accordingly, the implicit trading costs in open outcry markets have significantly increased. We also show that the volatility of bid-ask spreads in illiquid open outcry markets has increased, which is consistent with a decrease in the depth of the market. In addition, we find that the fast rate of price discovery in electronic markets instabilizes the bid-ask spread in open outcry market. Our results are particularly important for practitioners in that the performance of their portfolio and risk managements critically depends on which market dominates liquidity.

Trader Survival: Evidence from the Energy Futures Markets

We analyze the adaptation of traders and the determinants of trader survival during a period of changing market structures. Our unique sample of transactions level data covers the introduction of electronic trading in the NYMEX energy futures market. The results show that most floor traders adapted to the side-by-side electronic and open outcry trading, although trader attrition increased and the profitability of surviving traders declined dramatically. We also find that trading profits, trader experience and sophistication, and dual trading have a positive effect on the probability of trader survival. Scalpers are less likely to exit trading in pure open outcry trading, but are more likely to fail than traders who hold open positions longer in side-by-side trading. Finally, traders trading in multiple energy futures markets and those who use both the exchange floor and electronic trading appear to have a survival advantage in side-by-side trading.

Structural changes, bid–ask spread composition and tick size in inter-bank futures trading

This paper studies a period containing three major structural changes, which constitute a natural experiment in the NYSE.Euronext-LIFFE European short-term interest rate (STIR) futures market. These changes comprise (1) a 50% reduction in minimum tick size for the most heavily traded contract, (2) European Monetary Union and (3) the transition from open outcry to electronic trading. We analyse a number of microstructure features of the four largest European interest rate futures contracts throughout this period. In particular, we focus on bid–ask spread composition using a recent model which is appropriate for this market structure. Our analysis identifies the tick size as the largest bid–ask spread component in almost every instance, which suggests that participants in this STIR future market might benefit from a reduction in minimum tick sizes.

Smooth Plaid Models: A Dynamic Clustering Algorithm with Application to Electronic Financial Markets

Not long ago securities were traded by human traders in face-to-face markets. The ecosystem of an open outcry market was well-known, visible to a human eye, and rigidly prescribed. Now trading is increasingly done in anonymous electronic markets where traders do not have designated functions or mandatory roles. In fact, the traders themselves have been replaced by algorithms (machines) operating with little or no human oversight. While the process of electronic trading is not visible to a human eye, machine-learning methods have been developed to recognize persistent patterns in the data. In this study, we develop a dynamic machine-learning method that designates 15,686 traders in the E-mini S&P 500 stock index futures market into five persistent categories. Our method is based on a plaid clustering technique enhanced by a smoothing framework that filters out transient patterns. With the exception of high frequency traders (14 traders), the resulting categories of traders -- market makers (271 traders), opportunistic traders (7126), fundamental traders (254), and small traders (8021) -- play well-known, albeit it non-designated, market functions. High frequency traders, on the other hand, leave a distinctly more profound footprint in an electronic market.

Electronic versus open outcry trading in agricultural commodities futures markets

The Chicago Board of Trade (CBOT) introduced side by side trading of its agricultural futures commodities in August 2006. We analyze and compare market quality conditions in corn, soybeans, and wheat futures when these contracts trade simultaneously on open outcry and electronic trading venues. We find that volume migrates from floor trading to electronic trading and transaction costs are higher for floor than for screen-based trading. Nonetheless, we observe that both trading venues contribute significantly to price discovery. Given the recent surge in volatility in commodities futures markets, we also investigate activity variables such as volume that can help explain volatility in the two different trading platforms. We find that for agricultural commodities, variables that help describe volatility are not characteristic of the type of trading venue.