World Bank Favours Open Outcry Trading System

Though 'seemingly' chaotic, the open outcry system functioning in all commodity exchanges in India is highly efficient and functions as a low-cost form of futures market trading, a World Bank document says.

"There is no compelling reason for the existing, open outcry exchanges to shift to another system," the bank says in a document on futures commodity markets in India. "InIndia, it would still appear that the open outcry system is the most efficient even for new contracts. In most instances, physical facilities already exist, along with corresponding concentration of traders and brokers.''

Moreover, the scope of increasing the number of floor brokers remains large. It would be erroneous to elect an electronic trading system only because of its high-tech image," the bank says.

 

The open outcry system still prevails through the world's largest exchanges, although in Japan, China, New Zealand and South Africa, trade is predominantly through an electronic trading system, it says.

"The market participants show all the required skills. The trading sessions are fast and competitive, with participants engaging in a rapid play of hand-signals and shouts deals are registered instantaneously on standard forms," the document says.

"Participants understood the principles of arbitrage, put on straddles over two contract months if the price differential between months became too large or too small, and engaged in other more sophisticated trading strategies".

The document says large exchanges in the United States and Europe have also developed electronic trading systems to trade outside 'their normal trading hours'.

Electronic trading systems have high set-up costs, but make it very cheap to introduce new contracts.Some stock exchanges use a mixed electronic/open outcry systems, whereby bids are relayed by monitor and its reactions by open outcry, it says.