Analysis: LME open-outcry trade lives on as SocGen quit sparks no rush for exits

Marex

29/08/2024 02:00

(Repeats Wednesday's story with no changes to the text)
    By Eric Onstad
       LONDON, Aug 28 (Reuters) - The future of ring trading on
the London Metal Exchange looks assured for now after almost all
the firms involved told Reuters they remained committed to
open-outcry trading at one of the last venues to still support
it.
But with critical mass dropping towards the level at which LME
management has said it would suspend the process after Societe
Generale said last week it would no longer take part, its longer
term outlook is less sure.  
    The ring has its roots in the early 19th century when the
Royal Exchange, the world’s first commodities market, became so
crowded that metal merchants gathered at the Jerusalem coffee
house on Cornhill in the City to conduct business.
    In the 1980s, about 30 firms dealt in the LME ring, which
features a circle of padded red leather seats for traders who
use arcane hand signals during five-minute bursts of intense
trading in copper, aluminium and other metals. 
    Now, just seven participants remain, and the LME has said
the floor will close if the number of ring members falls below
six, or if their trading in the second ring falls to less than
75% of last year's level. 
    The LME, owned by Hong Kong Exchanges and Clearing Ltd
 0388.HK , said on Friday that trading volumes remain above the
75% threshold, but did not say by how much. It declined to
comment further.
    Several sources said high costs for ring-dealing firms and a
global trend towards electronic trade threaten to undermine the
minimum number of participants required to keep the age-old
trading method afloat.
    The loss of the ring, which involves four sessions of
trading a day, would be a blow for miners and industrial firms
that value floor trading. 
    They regard open-outcry dealing, used to crystalise official
prices for physical deals using a complex structure of multiple
forward dates, as absent of speculative influences.
    For years, there has been tension between traditional
physical users and the financial community that includes hedge
funds, speculators and Commodity Trade Advisor investment funds
and funds driven by algorithmic programmes.
    Many long-standing users see a risk too that an excess of
computer-driven speculative flows can distort prices that are
key to deals in physical metal. 
    "It's that second ring close, the official price, that's
void of algos, void of CTAs, void of specs, that still has an
appeal," said Marc Bailey, CEO of ring-trader Sucden Financial. 
     
    QUESTIONS OVER VIABILITY
    An outcry from physical LME users saved the ring three years
ago when the 147-year-old LME proposed to close the trading
floor and join the bulk of other financial exchanges that have
moved to pure electronic trading. 
    The exchange argued that a temporary switch to full digital
trading during COVID-19 proved that the ring was not essential. 
    But the LME eventually compromised and now operates on a
hybrid basis, using open-outcry trading for official prices used
by physical users as benchmarks for their deals and an
electronic system for closing prices.
     Longstanding questions about the viability of the ring
resurfaced on Aug. 23 when Societe Generale  SOGN.PA  said it
would drop the top-tier membership that allows floor trading.
    A Reuters survey showed there is still a commitment to the
ring for now by the bulk of existing ring members, backed by
miners and companies that use physical metal.
    "There are enough people that still want an independent
price for physical trading," said Sucden's Bailey.
    Marex Group  MRX.O  also said it would continue ring
trading, while StoneX Financial  SNEX.O  said it had no current
plans to change its approach to the ring. 
    Sources with direct knowledge said Amalgamated Metal
Trading, CCBI Global Markets and GF Financial also planned to
continue on the LME floor, while Sigma Broking declined to
comment.  
    Ring members must bear the extra cost of having traders both
in the office and on the LME floor, which can cost $1 million a
year, one industry source estimated.
    "It's expensive to maintain, but we're still making money
from the ring," said an executive of a ring dealer who declined
to be named.
     
    SMALL PLAYER
    SocGen was a relatively small player in the ring, and one
LME executive estimated the company accounted for only 6% of
open-outcry trading. An executive at an LME ring dealer said
they expected its ring business to be redistributed to one or
more of the remaining brokers. 
    Some LME members argue that electronic trading worked during
COVID-19 and a full shift is inevitable. 
    "The writing is in the wall," said an industry source. "The
ring is actually irrelevant, as those prices were compiled
electronically during COVID and no one noticed any difference."
    But the ring still has support. One executive at a European
company that buys LME metals to make its products said the
exchange should create a more viable ring by coming up with more
cost-efficient solution. 
    "Without the ring, the LME is just another raw materials
exchange," he said.

(Reporting by Eric Onstad; Editing by Veronica Brown and Jan
Harvey)
((mailto:eric.onstad@thomsonreuters.com; +44 20 7542 7093;
Twitter https://twitter.com/reutersEricO; Reuters Messaging:
rm://eric.onstad.thomsonreuters.com@reuters.net/))