Jefferies Group Inc., which said last year it wanted to be among the top five brokers on the London Metal Exchange, stopped trading on the floor of the world’s biggest industrial-metals marketplace after 14 months.
Jefferies Bache Ltd. is now a Category 2 member, the LME said today in a notice to members, meaning it is limited to dealing electronically and by telephone. Other Category 2 members include Barclays Plc and Natixis SA, which stopped trading on the LME floor last year.
The change leaves 10 companies including JPMorgan Chase & Co. and Societe Generale SA entitled to trade on the LME floor, known as the ring. Transactions taking place in the ring account for about 5 percent of volume, excluding phone trades that are based on ring prices, according to the exchange. Hong Kong Exchanges & Clearing Ltd. pledged to maintain floor trading until at least January 2015 when it bought the LME last year.
“The ring is clearly struggling,” said Wiktor Bielski, an analyst at VTB Capital in London with more than 30 years of experience in metals and mining. “In the old days, ring-dealing membership was highly sought after. Now, with screen-based trading having taken over so much, you’ve got to think that unless you are really 100 percent committed to physical, it’s hard to justify paying the fees.”
Ring-dealing members pay an annual fee of 55,000 pounds ($89,000), before expenses to maintain a floor staff. Running a ring-dealing team may cost 2 million to 4 million pounds a year, according to estimates by Mo Ahmadzadeh, a managing partner at Southold Capital in New York.
Electronic trading accounts for as much as 40 percent of LME volume and phone orders have a share of as much as 50 percent, according to the exchange. The proportion of transactions conducted in the ring has remained “more or less the same” since 2009 and the LME has no plans to shut down ring trading, spokeswoman Miriam Heywood said by phone.
“We are very committed to growing the LME business, but we need to be open-minded to the fact that the industry is changing,” Marc Bailey, president of Jefferies Bache in London, said today. Electronic trading “continues to seize market share,” he said in an e-mailed statement.
The LME, founded in 1877, accounts for more than 80 percent of global metal-futures trading and operates London’s last open-outcry trading floor. Prices used as a benchmark by producers, consumers and merchants are established during the second daily ring session. Open-outcry allows brokers to handle larger volumes at the same time. Some simultaneous buying and selling of contracts for different delivery dates, known as carry trades, can be done faster and in bigger amounts in the ring.
“I don’t see it as a knockout blow to the ring,” Ahmadzadeh said by phone. “Clearly this is not positive for ring trading, but to the extent that carry business and settlements are most effectively executed on the floor, I would expect the ring to continue to serve that purpose.”
The International Petroleum Exchange and the London International Financial Futures & Options Exchange already shut dealing pits. ICE Futures U.S. ended floor trading of commodities including cotton in 2008 after 128 years.
“We can’t stand still,” LME Chief Executive Officer Garry Jones said Oct. 8 in a speech. “If you look at, for example, when Liffe lost the Bund contract to Eurex, it was all about electronic trading. The closing of many of the pits of the CME really revolutionized that market. And ICE’s success is largely based on going into markets and changing the way they operate.”
Commerzbank AG and Merrill Lynch International are among the LME’s 31 members in Category 2, a total that includes Jefferies Bache, the exchange’s website shows. The LME rulebook has no stipulation for a minimum number of Category 1 members, Heywood said by phone.
“As long as there is sufficient volume and liquidity transacted across the ring, an effective price-discovery process will be maintained,” she said.
Jefferies was a Category 2 member until Sept. 5, 2012, when it began trading on the floor after hiring Michael Frawley to lead its metals desk and doubling its metals staff to about 50 people. Jefferies Bache aimed to rank among the exchange’s five largest brokers by transaction volume, spokesman Richard Kahleel said that month.
Frawley left Jefferies last month, according to two people familiar with the matter who asked not to be identified because the information is private. Jefferies was acquired by New York-based Leucadia National Corp. in March.