LME Will Review Future of London’s Last Open-Outcry Trading

The London Metal Exchange, operator of the city’s last trading pit, may decide on the future of the floor next year, said Charles Li, chief executive officer of Hong Kong Exchanges & Clearing Ltd., LME owner.

“We have not made up our mind yet,” Li said in an interview in Singapore today. “It is something that makes a lot of sense for a long time so there must be a great reason for it to be there. We will be looking at it, and will look at it with an open mind. There is no decision.”

The LME, founded in 1877, accounts for more than 80 percent of global metal-futures trading. Prices used as a benchmark by producers, consumers and merchants are established during the second daily session of floor trading. The International Petroleum Exchange and the London International Financial Futures & Options Exchange closed their pits.

The bourse may boost staff to 250 by the end of next year, said Li, without specifying the size of the increase. He was attending a Futures Industry Association conference.

Jefferies Group Inc. stopped trading on the floor of the exchange last month, following Barclays Plc and a Natixis SA unit last year. The changes left 10 companies including JPMorgan Chase & Co. and Societe Generale SA entitled to trade on the floor known as the ring. There were 11 floor traders in 2001, 17 in 1996 and about 30 in the 1980s.

Hong Kong Exchanges & Clearing pledged to maintain floor trading until at least January 2015 when it bought the LME last year for $2.2 billion. 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.

Official Prices

“The fact that only 5 percent of trades take place doesn’t seem to me very important,” said Christopher Gilbert, a professor at the University of Trento in Italy who has followed the LME for four decades. “You have to have some system for generating the official price, which is the price off-exchange transactions are priced against. It does serve a valuable function.”

Larger Volumes

Open-outcry allows brokers to handle larger volumes at the same time, concentrating liquidity, according to Gilbert. 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. Open-outcry trading, where traders face each other, offers transparency, according to Michael Overlander, the CEO of Sucden Financial Ltd., which has 26 people in its floor trading operations.

“When I was a young boy in short trousers, when I first started working here, there were 42 traders” on the ring, Overlander, 62, said by phone last week. “It still seems to be doing alright. The obituaries have been written for the whole of this century and a good chunk of last one, but for all I know they will still be written in 10 years from now.”

Ring-dealing members pay an annual fee of 55,000 pounds ($90,000), 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 LLC in New York.

“Nowadays the profit of an LME ring operation requires the member to transact substantial volume of investment bank and macro hedge fund carry trades,” Ahmadzadeh said last week. “The flow of those transactions often follows existing relationships.”

Telephone Trading

Electronic trading, introduced in 2001 and available from 1 a.m. to 7 p.m. London time, accounts for as much as 40 percent of LME volume. Telephone trading, available 24 hours a day, has a share of as much as 50 percent, Garry Jones, the LME CEO, said last month. 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 ring trading, spokeswoman Miriam Heywood said last month.

The LME would have to have its electronic platform adapted for the settlement of official prices if the floor is closed, according to Gilbert.

“If the ring were to go, then that would in the end mean the LME would move toward the standard American futures model,” Gilbert said. “I don’t think it would necessarily be quick but I think it would happen.”

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