With the millions of investors and traders across the country involved in the stock, options, and commodities markets, very few have actually seen these products traded in person. Someone who has never taken a tour of any one of these trading floors is missing out on an art that takes years to perfect yet only seconds to appreciate.
Back before technological influences made their way into the various markets, the only truly effective manner of communicating all potential buys or sells was through speaking loudly (the term “yelling” or “shouting” could be substituted) or by communicating with ones hands. Interestingly enough, Chicago was one of the first cities with exchanges that quickly adopted the hand signals as one of the most basic and effective forms of mass communication.
The CME, CBOT, and CBOE have all been using hand signals for years (CBOE since the 1970’s, the others from the turn of the previous century). Even though the CME is one of the only institutions left in the country that still use this method on a regular basis, the CBOE SPX (options on the S&P 500) pit uses a mix of computer hand-held tablets as well as open outcry/hand signals to make the trades day by day. For those who are lucky enough to witness this developed combination in action recognize the immense concentration and practice it takes to trade effectively.
The SPX pit is where the old school open out-cry with hand signals are used frequently and necessary for traders to execute trades. This being the case, the aspect of visual communication is ideal for everybody in the pit. Basically, the pit is less of a pit and more of a small amphitheater with large raised levels to support all the traders. Now fill it with hundreds of traders with tables strapped to their chest manning a stylus in one hand while shouting and throwing out bids and offers for calls and puts with the other hand.
You can’t help but gawk at all the color splashed trading jackets (representing different trading firms), the 20 foot monitors displaying the underlies prices hanging from the ceiling, and of course the rapid flailing movements paired with the erratic yelling and screaming of the traders trying to obtain the best price possible. It truly is a spectacle just to be able to observe this constant process.
Deciphering some of the signals is easy at first, which helps better grasp the understanding of what is actually going on when all some people see is screaming and swinging of limbs. Whenever a trader has his palms directed towards the face they are indicating a buy or a bid on an underlying position to initiate a position or to close it out. The opposite of that is when the palms facing away, representing the sale of an option or the asking price where that trader would be a seller of options. The hand formation of the “C” shape leads you to believe the signal for Calls is being displayed while the connection of the index finger to the thumb, similar to an upside down “P” or the “A-Ok” sign, shows Puts are being discussed. Other hand signals might denote which option expiration is being discussed, which brokerage firm a floor broker is representing, which option strike price, etc.
Thinking in this way may be pretty straight forward by the time you read all of that, but in that time, 30,000 contracts could have been exchanged and the price could have moved half of a percent. Obviously, this environment is not for those with slow reaction times.
The contract quantities are just another factor that traders need to think about when considering a transaction. The values one through five are displayed vertically on the hand and six through nine horizontally. The larger values are a little more detailed and the excerpt from an online student manual for traders and clerks below shows the large sums of proposed contracts traders must read accurately.
The market opens 8:30 am CT, and closes at 3:00 pm CT five days a week for individual stock options and until 3:15 for indexes like SPX. Each day, that’s six and a half hours of hand movements, yelling orders through for priority from traders, surrounded by hundreds of other people, all inside what they call the SPX “pit”. The floor traders who understand and speak this fascinating hand signal language are beyond valuable to the customers, brokers, and even the exchanges. Just reading about the organized chaos that it is online is one thing and seeing it in person is experience all its own.
(editors note: Bennett is a hard-working intern here at CBOE, back to Loyola U Chicago in the Fall for his senior year)