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LME to keep open-outcry trading ring after review

Highlights

The London Metal Exchange has decided to maintain and further invest in its open-outcry trading floor known as the ring following a six-month internal review and discussions with market participants, the LME said Monday.

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"The LME will continue to host the ring, with its robust and transparent price-discovery process, for as long as the market needs it," said CEO Garry Jones, co-head of global markets at parent company Hong Kong Exchanges and Clearing, in a statement.

"Our review has highlighted areas where we can enhance the ring and increase its efficiency alongside the LME's other trading venues," Jones said.


"We will be particularly focused on further aligning it with our electronic trading venue, LMEselect, and on ensuring that it continues to meet global standards for transparency, integrity and governance."

The ring, which has serviced the global metals industry for 137 years, is Europe's only remaining open-outcry trading venue.

PRICING

"It's as good an announcement as we could have hoped for. It shows a lot of confidence in what is seen by some as an anachronistic system -- but it works," said a trader with one LME ring-dealing member.

"There's more outright three-months business done on LMEselect, but in terms of the the official price, that's where it's discovered," he added.

The LME official prices, unofficial prices and closing prices are all or in part discovered on the trading floor. Each LME metal is traded in five-minute ring sessions; trading on the ring begins at 11:40 am UK time and ends at 5:00 pm.

Ring trading runs alongside the LME's electronic platform, LMEselect, and the inter-office telephone market, but only Category 1 ring-dealing members of the exchange can trade in the ring. There are currently 11 ring-dealing members at the LME.

The LME said it is investing GBP1 million ($1.7 million) into ring-based technology this year. New wall boards will be fitted on the trading floor with enhanced technology to help integrate ring and LMEselect pricing and to facilitate business conducted in the ring.

"While we value the ring's long and distinguished history, we are conscious that we need to continue to keep it relevant for the global market and able to serve its needs," Jones said. "We will work with users to further enhance ring-based trading to keep pace with the rapidly changing marketplace and generate more volume."

Since 2010, the LME said it has introduced more than 20 new rules "to ensure that its price discovery process remains as efficient as possible while servicing members and their clients in an evolving trading landscape."

In 2013, the LME doubled the seating capacity for ring-dealing members to cater for floor teams. In 2014, the exchange concluded, through an internal audit, that the ring meets the IOSCO Principles for Financial Benchmarks.

"The LME remains committed to ensuring adherence to global standards for transparency, integrity and governance, and will continue to conduct internal and external audits on all its trading operations on an ongoing basis," the exchange said in the statement.

"I do actually think the ring has something to offer," the trader said. "The scandals -- if that's the right word -- on markets like LIBOR and FX have played into its hands."

TRANSPARENCY

The transparency of the ring process was a theme that came through strongly during the review, Stuart Sloan, the LME's chief operating officer, told Platts Monday.

"It does seem to be a transparent and open process with a strong degree of integrity," he said.

The review of the ring took place "as the LME looks to leverage business opportunities following its acquisition by HKEx in December 2012," the exchange said, adding that more than 25 stakeholders participated in the review, including all 11 ring-dealing members and several industry trade bodies.

The response from review participants was "generally positive and supportive of the ring," Sloan said, adding that process had highlighted three main areas where the ring performs well -- carry trading (i.e. the simultaneous purchase and sale of the same tonnage of the same metal for delivery on different dates), providing access for ring-dealing members and their customers to closing prices, and "perhaps most of all, offering a transparent and open process for setting the official prices in the middle of the day and the closing prices at the end of the day."

Ring trade currently accounts for around 5% of total LME volumes, but the exchange believes there is "ample liquidity during the key points" of the price-setting process, he said.

The HKEx purchase of the exchange has brought with it an increased focus on Asian markets, but while the LME has considered the possibility of amending floor trading times to offer more overlap with the Asian trading day, "it's not something we're going to change right now," Sloan said.

The LME already sees significant Asian activity on LMEselect, which opens at 1:00 am UK time, and Asian market players do also participate in the official price process even though it falls fairly late in the Asian day, he added.

--Andy Blamey, andy.blamey@platts.com
--Mayumi Watanabe, mayumi.watanabe@platts.com
--Edited by James Leech, james.leech@platts.com