LME Reversal on Trading Floor May Kill It Anyway, Brokers Warn

The London Metal Exchange has bowed to pressure not to close its iconic trading floor, but the brokers who trade on it aren’t celebrating. Instead, they’re warning a compromise plan to reopen “the Ring” could prove its downfall.

The LME on Tuesday reversed course on an earlier proposal and said that open-outcry trading would resume in September, in a victory for floor traders and physical users who’ve been lobbying hard to save it. But the Ring will only be used to set so-called official prices -- which are widely used in the physical industry and are established around lunchtime -- while evening closing prices will be set electronically. That potentially deprives Ring dealers of an important revenue stream.

At stake is the future of one of London’s oldest financial institutions, and one of the world’s last open-outcry markets. The Ring traces its origins back to the early 1800s, and still has staunch supporters in the metals industry who reacted furiously to the LME’s proposal in January to close it for good.

There is a risk that the LME’s plan could make it commercially unviable to operate the Ring, said Simon Van Den Born, president of Marex, which is one of the largest of the nine Category 1 brokers -- dealers licensed to trade on the floor. Executives at three other Ring dealers expressed similar concerns, asking not to be identified.

“My sense is that it would get quite commercially difficult to staff an open-outcry platform, for what could be effectively two hours a day,” Van Den Born said in an interview. “The LME has attempted to find the middle ground, assuaging the angst of the Category 1s, while appeasing the physical players. My sense is they’ve probably missed the mark.”

On a call immediately after the plan was announced on Tuesday, the head of another brokerage told LME Chief Executive Officer Matthew Chamberlain that his plan appeared to be a way of trying to close the Ring “by suffocation,” according to several people familiar with the matter.

LME Reversal on Trading Floor May Kill It Anyway, Brokers Warn

In an interview, Chamberlain denied that the LME’s plan was an attempt to close the Ring by the back door. Instead, by moving to electronically set closing prices, the LME could attract greater volumes from financial market participants, he said.

“The opportunity which we’re very open that we’re pursuing is about bringing more financial participation to our exchange,” he said.

He acknowledged that the plan would represent a change for Ring dealers, but said he was “very hopeful” that they would still have a viable business.

The LME suspended trading in the Ring as the U.K. went into lockdown last March, and switched to an electronic system to establish daily benchmark prices. Even before the pandemic, there were doubts about the long-term future of the Ring due to mounting cost pressures on a diminishing number of floor dealers.

Should that squeeze continue, further departures could spell the end of the Ring, even as it prepares to reopen.

The LME said Tuesday it will consult on rules that would allow it to close the Ring automatically in certain scenarios, including if the number of active Ring dealers falls below six. At least one Ring dealer laid off some staff after floor closed last March, and others may weigh similar decisions if their traders face a lighter workload.

There have been questions over the future of the Ring ever since electronic trading took off on the LME in the early 2000s, but it’s endured far longer than many rival pits. The New York Mercantile Exchange and the International Petroleum Exchange closed their oil-trading floors years ago, while CME Group last month said it will keep its agricultural options pits in Chicago closed, marking the end of an era for open-outcry trading in U.S. commodities markets.

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.