Definition
The term trading pit refers to a section of a trading floor that is dedicated to the buying and selling of financial instruments through open outcry. Transactions that are not completed through the trading pit are executed electronically.
Explanation
Prior to the 1980s, buy and sell orders on the stock and futures exchanges were executed using the open outcry method on the trading pit. Open outcry is a combination of shouting and hand signals traders and stock brokers would use to exchange buy and sell order information. Traders associated with a brokerage house could be identified by the color of the jacket they wore on the floor. Clerks were responsible for taking orders from customers, while runners were tasked with relaying the orders to traders.
During the decades of the 1980s and 1990s, the trading pit was slowly replaced by electronic exchanges and by the turn of the 21st century, few exchanges still maintained a trading floor since electronic exchanges were more efficient and economical. While the majority of trades are executed electronically today, there are still a small number of high price per share common stocks that are traded on the floor where it may be possible to obtain a more favorable price for the investor.
Related Terms
underlying asset, transaction cost, tick size, adjusted futures price
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