London’s Ring metals trading floor wins battle to reopen

The London Metal Exchange has withdrawn plans to close its distinctive Ring trading floor permanently, bowing to a passionate effort to maintain the pit where brokers and industrial traders have gathered for more than 140 years.

The LME Ring has been closed for more than a year during the pandemic, and the exchange operator had suggested shifting to a fully electronic model.

But the plans united traders and industrial users of all sizes in opposition to the LME, which is owned by Hong Kong Exchanges and Clearing. It received 192 individual comments in a two-month consultation period, an “unprecedented” response according to the exchange.

In a statement on Tuesday, the LME said it would allow official prices for metals — set in its trading pit in a lively period before lunchtime every day — to continue. Full-time trading will recommence in the Finsbury Square facility on September 6.

Matthew Chamberlain, chief executive, said the LME had been surprised by the response from members, especially physical traders, sparking the shift from the initial plan. It will hold a fresh consultation on the amended plans over the summer.

“We can’t be the sole arbiters of the best interests of the market. We must listen to what the market actually wants,” he told reporters.

While keeping the Ring open, the exchange is still making some concessions to more modern practices, such as allowing members to continue using electronic trading to set the daily closing price, as they have done through the pandemic. Many market participants, such as hedge funds and market makers, rely on the final price to calculate the value of their portfolios.

During the temporary closure in the pandemic, the smooth operation of the exchange — typically used by brokers on behalf of companies that produce metals for manufacturing — suggested that the famous historic red sofas of the physical trading Ring had become a relic. Its stay of execution means this will be the last major physical trading venue in Europe.

Trading volumes had increased without any deterioration in the window to set pricing in its main metals markets, one of the chief functions of the Ring, the LME added.

But users worried that a switch to full electronic trading would mean they could no longer hedge metals prices for specific days into the future — a unique feature of the LME — rather than in the standardised one- or three-month increments available on most futures exchanges.

The split in views was most apparent between traditional participants and the LME’s larger merchant trader and financial participants, who backed the move towards electronic trading, the LME said.

“We do have this ability to respond to both sets of feedback,” Chamberlain said. “And to calibrate each pricing session accordingly.”

Still, Neil Welsh, metals broker at LME member Britannia Global Markets, said the Ring could lose its relevance if there was not enough physical trading to sustain it.

The Ring name reflects its origins when metals merchants would draw a circle on the sawdust floor of a City of London coffee house in the 19th century, as a signal to begin trading. The current version of the Ring dates back to 1877.

Since the turn of the century, more investors have preferred to trade electronically and remotely, leading exchanges around the world to shut their floors. The coronavirus pandemic has applied a further blow. CME Group, the world’s largest futures exchange, will close most of its remaining open-outcry pits in September.

The LME, which was bought by HKEX for £1.4bn in 2012, has sought to broaden its number of market participants in the face of growing competition from rival exchanges in the US and China.

Chamberlain said he was confident that making the closing prices electronic would attract more financial participants to the exchange. “Do I think we’ll be able to get more business from the changes I’m making? Yes I do,” he said.

The slow decline of floor trading

1998

“The Battle of the Bund” led to Germany’s Eurex exchange seizing the market for futures on the country’s long-term debt from London rival Liffe. The contracts had been traded by “open outcry” in the UK, but traders preferred the electronic version because it could be more easily traded remotely, and shifted en masse.

2001

Intercontinental Exchange, then a small start-up, made waves by buying London’s International Petroleum Exchange (IPE), where most volume was traded on the floor. Taking its cue from the Battle of the Bund, ICE built a modern electronic platform.

2005

ICE announced the closure of IPE’s pits, turning energy futures contracts such as Brent crude fully electronic. Weeks later IPE’s then-larger rival, the New York Mercantile Exchange (Nymex), unveiled plans for an open-outcry pit in London.

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2006

Nymex abandoned its plan to reintroduce floor trading in oil contracts after eliciting little interest from traders.

2012

Intercontinental Exchange ends 142 years of history by shutting the soft commodity trading pits in New York as volumes dwindled, in favour of electronic trading.

2015

After 167 years, CME shut most of its trading pits in Chicago and New York. Open-outcry trading had fallen to just 1 per cent of total futures volume. The decision included the Nymex open-outcry futures pits, which CME bought in an $8.9bn deal seven years earlier. Only pits connected to some options remained open.

2020

Coronavirus forced CME and Cboe Global Markets to shut their trading floors in Chicago, but they reopened over the summer. Among the precautions, traders had to submit to health checks and wear face shields in the pit.

2021

London Metal Exchange consulted about closing its open-outcry Ring after trading was temporarily halted by the pandemic.