London Metal Traders Set Prices at Home as Ring Falls Silent

(Bloomberg) -- For more than a century, the world’s metals prices were set at a daily shouting match between a dozen or so traders sitting in a circle in the heart of the City of London. Then the coronavirus struck.

As the U.K. imposed a lockdown in mid-March, the London Metal Exchange’s trading floor, known as “the Ring,” fell silent for the first extended period since World War II. Traders swapped the barked commands and hand gestures that set global benchmarks for markets including copper, aluminum and zinc for a frenzied mix of phone calls, instant messenger chats and screen trading.

Despite the challenges, and concerns over a recent dip in trading volumes, the switchover has broadly been a success. That’s raised questions about the long-term future of the Ring as one of the last open-outcry trading floors in the world. The LME is keen to reopen the floor as soon as it’s safe, but first its Ring dealers must come through the pandemic with their businesses intact.

“If the Ring is still unable to open after a sustained period of closure, it’s difficult to say what this will mean for the future of the Ring, but for now we’re all committed to reopening once it’s safe to do so,” LME Chief Executive Matthew Chamberlain said in an interview. “If it does need to close, which I sincerely hope it does not, I’d much rather -- and I’m sure the LME community would agree -- that it was a decision made by the LME’s members, rather than a virus.”

While the LME’s most liquid-contracts were already more actively traded electronically, the Ring has remained the preferred platform to set benchmark prices for contracts that stretch up to a decade into the future. When the Covid-19 outbreak forced the LME to close the floor, the onus was put on electronic traders to price illiquid spreads and longer-dated contracts. At particular issue were the so-called “cash” prices, for delivery in two days’ time, which typically trade most actively on the Ring and are the benchmark for much of the physical metals trade.

Skeleton Crews

Traders and executives at six Ring-dealing firms said they’re adapting to the new electronic environment well so far, but life without the Ring has not been without its headaches.

For instance, juggling complex trades in several different metals is easier in the Ring than it is on a screen, while guaranteeing benchmark cash prices has become more problematic now that they’re set electronically using a volume-weighted average. Even so, they’re finding solutions, such as asking clients to submit orders earlier to give them time to find others to take on the opposite side of the trade.

Still, some traders said moving away from the Ring has made their clients wary about placing more complex trades, such as long-term hedges that line up with purchases and sales they’re making in physical markets.

As with the rest of London’s financial industry, many floor traders are now working from home or manning their central London headquarters in skeleton crews. A couple of traders are even using side offices adjoining the LME’s dormant dealing floor.

Chamberlain said Ring-dealing firms have been instrumental in smoothing out the migration to the screen. “They were the key drivers in making this transition so successful,” he said.

There are now only nine LME member firms that can trade on the floor, down from more than 20 in the late 1980s and about a dozen in the early 2000s, when electronic trading started to take off. While the LME is keen to reopen the floor as soon as it’s safe to do so, much will depend on how well the Ring dealers weather the current crisis.

So far, the closure of the Ring hasn’t hurt their performance too much, according to executives at several firms, who asked to remain anonymous. Market volatility meant that many LME brokers had their best month on record in March. Moreover, other banks and brokers have continued to route orders through them even with the Ring closed.

Inter-Dealer Tensions

Still, tensions emerged when some large banks, which don’t trade directly on the Ring, pushed for the LME to introduce “trade-at-settlement” contracts that would have allowed dealers to match up orders for the benchmark settlement prices electronically. That could have delivered a fatal blow to the business of some ring members, and eventually the LME decided not to do so, according to several executives.

Even as business has slowed in April and May in line with a broader decline in trading volumes, brokers won’t be pressuring the LME to reopen the floor quickly while Covid-19 risks loom large, said the executives.

Virus Looms

U.K. Prime Minister Boris Johnson on Sunday said it’s possible some social venues could reopen by July, but the LME may take a more cautious approach. Given the inherent challenge of ensuring the safety of the 100 or so staff who work in close proximity on the floor, the exchange has said it plans to keep the Ring closed while social-distancing requirements are in force.

“Our understanding from LME management is that this was seen as a temporary measure and when people return to work, the Ring will return,” Ian Lowitt, CEO of leading ring-dealer Marex Spectron Group, said by phone. “But if it doesn’t, then we’re also set up to continue to serve our clients in the absence of the Ring.”

©2020 Bloomberg L.P.