End of an era? LME proposes closure of open-outcry trade

(Image courtesy of FastMarkets via YouTube.)

The London Metal Exchange has proposed closing Europe’s last open-outcry trading floor and moving permanently to an electronic system, cementing a change sparked by the coronavirus pandemic.

The LME floor closed in March 2020 for the first time since World War II to allow the social-distancing needed to deal with covid-19, silencing its red ring of seats and the theatre of arcane hand signals and frenzied shouting by traders.

LME Chief Executive Matthew Chamberlain told Reuters such a move would allow a broader range of participants and boost transparency of prices used as benchmarks around the world.

The proposal was included in a discussion paper issued by the exchange on Tuesday

But the closure is likely to be resisted by some of the exchange’s floor members who have experienced a significant trading volume drop for industrial metals including copper, aluminium, zinc, lead, tin and nickel over the last 10 months.

“The ring is a greatly treasured aspect of the LME’s rich 144-year history, and its closure is not a decision we…will take lightly,” Chamberlain said.

The proposal was included in a discussion paper issued by the exchange on Tuesday. The deadline for responses is March 19.

“A board meeting in April will consider the feedback and appropriate decisions will be made there. We will aim to publish something in the second quarter of this year,” Chamberlain said.

“If the virus situation resolves itself before the process is completed we will, if the members want, open the ring.”

Since the coronavirus crisis began, Chamberlain has said the LME would not “close the ring by stealth”.

“However, it is fair to observe that this period of electronic pricing has served the market well, with consistently high volumes of activity…easily observable by all stakeholders, and more participants with direct access.”

Analysis of trading data by the LME shows that volumes on the exchange’s electronic trading system, LMEselect, between June 12 and Dec. 9, 2020 were significantly higher than ring volumes between Sept. 23, 2019 and March 20, 2020.

For example, average daily volumes of the three-month aluminum contract were 130% higher.

Arguments against closing the floor have typically included the idea that broken date trading, where any single date between cash and three months is tradeable and which makes the LME market unique, would become difficult.

Broken dates provide flexibility for producers and consumers who rely on transport schedules.

“The proposals allow us to try and get the liquidity on the screen, but if it turns out that some dates are so illiquid, not suitable for screen trading they can be traded as before (for example on the telephone).”

A regulatory news service for stock warranting or cancellations “for certain physical transactions, above a specific size” is included in the paper.

Other proposals being explored are regular reporting of over-the-counter positions and rules to limit any one company’s ability to acquire significant holdings of new or remaining warrants.

Cutting fees for electronic trading, and raising fees for direct trading between members to incentivise use of the electronic system, are also included.

(By Pratima Desai; Editing by Veronica Brown, Jason Neely and Bernadette Baum)

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