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LME to reopen 'Ring' trade September; to close prices electronically

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LME to reopen 'Ring' trade September; to close prices electronically

Highlights

Members, financial players support Ring lunchtime pricing

LME to push 'electronic liquidity' from 2022

London — The London Metal Exchange will reopen its so called trading Ring on Sept. 6 for determination of official metals prices due to demand by members and other stakeholders, even following an earlier proposal by the 144 year-old exchange to permanently close traditional open outcry trading and move to an electronic process to boost transparency.

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Market closing prices will however be determined electronically, enhancing participation and transparency, supporting financial customers and larger physical users, LME CEO Matthew Chamberlain said in a presentation to reporters on June 8. Electronic liquidity enhancement plans will be optimised and commence in 2022, he said.

The decision taken to discover prices partly by open outcry and partly electronically "respects the unique nature of LME while enabling it to modernise and adapt to new market dynamics," the exchange said in a statement.

Nine Category 1 LME members are "confidently" expected to be back trading in the Ring on Sept. 6, well above the minimum of six required for this type of trading, according to Chamberlain.

Trading on the LME Ring was suspended in March 2020 due to the COVID-19 outbreak, and since this time official prices have been discovered electronically, in a process which has seen increased participation and enhanced transparency, according to the exchange. The decision to reopen the Ring in September has been taken following a market consultation in which a record 192 responses were received, with a majority in favor of reopening and introducing a degree of electronic trading, Chamberlain said. Official prices will be determined on the Ring to support physical customers who use these prices in their contracts, the LME said.

"The electronic discovery of Official Prices has worked well during the pandemic period -- due in large part to the support of Category 1 members," the LME said in its statement. "However, smaller physical participants, who are particularly focused on the lunchtime Official Prices, have expressed a preference for prices to be discovered in the Ring, and Category 1 members generally agree that they can best provide liquidity for such pricing in the Ring. Subject to consultation, the LME will resume discovery of the lunchtime Official Prices in the Ring."

Members insisted however that they did not want their fees to rise as a result of the decision to reopen the Ring, or move to a higher degree of electronic trading, Chamberlain noted.

'Strong support' for digitization

The LME has nonetheless noted "strong support" for its stated aims of promoting transparency, fairness and the digitization of its market more broadly, with the electronic closing price process used since March 2020 seeing increased participation and enhanced transparency.

"While the pricing methodology is inherently complex due to the number of dates that require pricing, the democratisation of the process itself has, in the LME's view, ensured a fairer and more representative marketplace. A permanent electronic shift in Closing Prices will allow for the evolution of a more deterministic electronic pricing methodology, which will further enhance the process," the exchange's statement said.

To support this transition to an increasingly electronic exchange, aiming for the benefit of the market as a whole, the LME also published June 8 a draft methodology and intends to form a Closing Price Working Group, comprising a broad range of market users, to ensure that the methodology continues to evolve to best reflect customer needs. The implementation of any methodology enhancements will be subject to a separate consultation, intended to be issued in the second half of 2021, it said.

The LME intends to identify a set of liquid contracts it believes can support electronic liquidity, with any new measures -- such as fee changes, a liquidity provider programme, promotion of an enhanced transparency cross trade and block rules -- applying only to this set of contracts.

Greater transparency is also to be achieved via an enhanced off-warrant stock reporting approach, it said.