The exchange ‘open outcry’ and the clearing house

The exchange ‘open outcry’ and the clearing house

It is understood that the exchange does not set the prices of the traded commodities. The prices are determined in an open and continuous auction on the exchange floor by the members who are either acting on behalf of the customers, the companies, they work for or themselves. The process of the auction, which has been around for over 100 years, is called an “open outcry”.

People are not only willing to buy, but also to sell, and they all can be doing this simultaneously. Every floor trader has his own auctioneer, the democratic feature of an open outcry is that only the best bid and  offer are allowed to come forward at any point in time, if a trader is willing to pay the highest price offered, he yells it out, and by law all lower bids are silenced, by exchange rules, no one can bid under a higher bid, and no one can offer to sell higher than someone else’s lower offer.

Difference between a floor broker and the broker with whom one can place order

A floor broker is buying or selling futures on the floor either solely for himself or filling orders for his customers who are the Brokerage Houses.

A broker off the floor is licensed by the future government to execute the orders on behalf of the public.

The pit

A pit is the heart of the open outcry market system. It is the place where the various bid and sell offers are made by floor brokers, and floor traders on behalf of their clients.

How price reach the Quote Board?

At the exchange, a pit observer, who is an employee of the exchange, stands in the pit with a walkie-talkie. Each time the price changes; the observer radios the info to the exchange operator, who enters the info to the exchange quote entry system.

The price immediately appears on the quote board and is simultaneously broadcasted on the exchange ticker to the public.

On the quote board, the most recent price appears at the bottom of a column process, with the next previous price above that and the 5 precious prices above that. As a trade is made the other prices move up, with the bottom, and the other prices move up, with the top price dropping off. The quote board also gives the previous days settlement price and the high-low of the days trading. And the net difference between the last price and the previous days settlement price.

Analysis

Commodity futures market is a 2 way market

There are various parameters that are standardized such as delivery months, the exchange, margins, leverage, brokerage and commissions.

One could take any one of the future positions out of the available ones

There are many types of orders, which a client can give to his broker.

The price is determined in a standardized manner

Interpretation

From the above analysis, it can be seen that, the commodity futures ‘modus operandi’ or operating procedure is very well defined at every level, and also standardized.

Thus there is very little scope for manipulation. Thus, it is an efficient derivative ‘modus operandi’.