Pit: What It Means, How It Works, vs. Electronic Training (2024)

What Is the Pit?

The pit on a securities exchange floor is the area reserved for buying and selling by traders. The traders buy and sell securities in the pit using the open outcry system, which requires shouting and hand signals. The latest prices are displayed in real-time, allowing everyone to compete for the best price.

The pit is also called the trading floor.

Most physical trading floors have been replaced by electronic trading platforms but a few still exist, including the one at the New York Stock Exchange (NYSE).

Key Takeaways

  • The pit is an area of a stock exchange reserved for traders buying and selling securities.
  • Brokers in the pit buy and sell securities using theopen outcrysystem, which combines vocal cues and hand signals.
  • Electronic trading platforms have entirely replaced trading pits at most exchanges.
  • A few pits have survived, including those at the NYSE and CME Group.

Understanding the Pit

When most people picture a stock exchange, they think of a fast-paced, chaotic environment inhabited by a cluster of traders shouting orders. This is accurate on some exchanges even today, although the surviving pits have shrunk in size.

The traders wear different colored jackets and badges that represent their brokerages. They're working to get the best price for their customers or for the brokerage houses that employ them.

Most of the activity takes place at the beginning and end of the trading day. Clerks take orders by phone or computer from customers in the pit, and runners transmit orders between clerks and brokers.

Brokers and dealers may buy for themselves, their firms, or their firm's clients. Specialists work their "books" or ledgers in the pit, making a market in securities and keeping track of orders awaiting execution.

Since all orders are displayed, everyone has a chance to participate in trading activity.

Very few physical trading floors survive today. The NYSE and the Chicago Mercantile Exchange (CME) Group still have pits.

Electronic trading platforms were first introduced in the late 1980s and early 1990s, Most of the world's major exchanges made the transition long ago.

Special Considerations

Traders in the pit shout, wave their arms, and use special signals with their hands to communicate their trading intentions on the floor. Hand signals facilitate faster trading and make communication possible over the crowd noise.

For instance, when a trader places their palms toward themselves, it indicates a buy order. If they place their hands away from themselves, it's a sell order.

Some exchanges develop unique signals. Traders on the floor of the Chicago Board of Trade (CBOT) indicate the month of January by using a fist to mimic jamming something into their heads. Traders at the CME group hold their throats between their thumbs and index fingers to denote the same month.

1998

The year that the Securities and Exchange Commission approved independent electronic trading systems. This allowed these platforms to register as legitimate exchanges and operate alongside traditional ones.

The Pit vs. Electronic Trading

Although there is still some appeal in the open outcry system, electronic trading is cheaper to run. Cutting out the middleman means a drop in fees and commissions for traders and investors and higher productivity for brokerages.

Exchanges including the NYSE and the CME Group began reducing the number of brokers on the floor in 1984 after adopting an updated system operated by phone.

The rise in internet technology in the 1990s completed the process. This period saw more powerful computers, higher trading volumes, and a drop in trading commissions.

The 2000s saw the rise of algorithmic trading and faster technology. With this boost in technology, traders and the companies they work for benefit from a higher volume of trades during the trading day.

Has the NYSE Ever Operated Without the Pit?

On March 23, 2020, the NYSE operated without a pit for the first time in its history but stayed open for electronic trading. The closure was due to Covid pandemic restrictions. The pit reopened on May 26, 2020.

The NYSE closed entirely on Sept. 11, 2001, after the terrorist attack on the World Trade Center. It reopened for business on Sept. 17, 2001.

Is There Any Purpose to Operating a Trading Floor Today?

Many exchanges are now fully electronic.

Proponents of the open outcry system say that it results in tighter spreads and better prices for investors. Human interaction, they argue, gives brokers a better sense of the real direction of stock prices.

How Many Floor Brokers Work at the NYSE?

There are about 500 floor brokers still working at the NYSE. At its peak in the 1990s, about 5,000 brokers and support staff worked there.

The Bottom Line

The pit, or the trading floor, is the area of a securities exchange that is set aside for traders who buy and sell shares in real-time for their clients and their brokerages. Electronic trading has largely replaced this process. Some major exchanges still have pits, although they have shrunk in size.

Pit: What It Means, How It Works, vs. Electronic Training (2024)

FAQs

Pit: What It Means, How It Works, vs. Electronic Training? ›

The pit, or the trading floor, is the area of a securities exchange that is set aside for traders who buy and sell shares in real-time for their clients and their brokerages. Electronic trading has largely replaced this process. Some major exchanges still have pits, although they have shrunk in size.

What is a pit in business? ›

Pit. An area in a stock exchange, commodity market etc, in which a particular stock or commodity etc. is traded. Dealers in these markets are called pit traders.

What are pit trading hours? ›

Glossary Terms » Pit Trading. Trading conducted within the normal hours of the NYMEX inside the open outcry pits. Pit hours are generally 9:45 a.m. to 3:10 p.m. ET for most contracts. With the advent of overnight or after hours trading on the ACCESS automated system, it has become necessary to identify pit trading.

What is a pit contract? ›

Pit Agreement means an agreement between the excavation site Owner and the Contractor describing the procedure for material excavation (see Section 106.02 of "Standard Specifications for Roads and Bridges" published by the New Hampshire Department of Public Works and Highways). Sample 1.

What is the full form of pit in finance? ›

Personal Income Tax (PIT) PIT is a tax levied on the personal income of an individual on an accrual basis from any or more of the following four sources: (a) Employment Income.

What is pit in technology? ›

What is public interest technology? Public interest technology refers to the application of technology expertise to advance the public interest, generate public benefits, promote the public good.

What is a pit system? ›

PIT is a category of both IT hardware and software that is physically part of, dedicated to, or essential in real time to the mission performance of special purpose systems.

What is pit and call option? ›

A call option is the right to buy a stock at a specific price by an expiration date, and a put option is the right to sell a stock at a specific price by an expiration date.

What is pit in sales? ›

Introduction. The pit is a particular part of the trading floor which is planned for the selling and buying of a security of a particular type via the system of open outcry. In the put, brokers are going to match the buy or sell orders being placed by the customers through handle signals and shouting.

How do puts and calls work? ›

How do puts and calls work? A call is a contract that grants you the option, but not the obligation, to buy an asset if the price hits a specific price by a specific date. A put is an agreement that gives you the option to sell an asset if the underlying asset reaches a specific price by a specific date.

What is pit cost? ›

With extensive experience in creating IoT applications, the development cost of an IoT app can range from $5,000 to $1,000,000. For IoT proof of concept (PoC), pricing typically falls between $5,000 and $20,000, while an IoT minimum viable project (MVP) usually ranges from $20,000 to $80,000.

What does pit stand for in industry? ›

Powered Industrial Trucks (PIT)

What is the pit code in banking? ›

The provisions of the PIT Code are designed to prohibit a Designated Person from Trading in Securities of the Company when in possession of Unpublished Price Sensitive Information.

What does the term pit refer to? ›

1. : a hole, shaft, or cavity in the ground. a gravel pit. 2. : an area set off from and often sunken below neighboring areas: as.

What does being in a pit mean? ›

the pits in American English

slang. an extremely unpleasant, boring, or depressing place, condition, person, etc.; the absolute worst.

What is called a pit? ›

a naturally formed or excavated hole or cavity in the ground: pits caused by erosion; clay pits. a covered or concealed excavation in the ground, serving as a trap.

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