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Most physical trading floors have been replaced by electronic trading platforms but a few still exist, including the one at the New York Stock Exchange (NYSE).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