LME metals traders chorus disapproval at impending twilight of the Ring

Brokers and industrial traders are pushing back against the London Metal Exchange’s plans to permanently close its historic Ring, where traders have gathered to trade for more than 140 years.

The exchange proposed shutting the trading venue in January, ending in-person dealing of commodities in Europe after futures exchanges in the City of London shut their floors in the early 2000s and transactions shifted to screens.

The trading floor itself has been closed for a year because of the pandemic. But the potential permanent demise of the red sofa Ring, where traders communicate through shouting and hand movements, has met heated opposition from some LME members and users.

“It’s lit an absolute fuse that’s blown up,” said one senior metals executive who declined to be identified because of the issue’s sensitivity. “[The LME] needs to wake up and see the message isn’t getting through. At the moment there’s lots of pointing and screaming without a lot of constructive dialogue.”

In January the LME, which is owned by Hong Kong Exchanges and Clearing, said trading volumes had increased in the 10 months since the Ring had been shut and that it was the “right time to consider the permanent closure of the Ring and a move to an electronic pricing structure.”

Matthew Chamberlain, chief executive of the LME, defended the proposal on Tuesday, saying it was a “balanced debate”. He said the exchange could appeal to the broader market with electronic pricing while retaining its distinctiveness.

“We believe the price significance of our physical market activity should be of interest to financial players,” he told the Financial Times. “If we make the decision to close the Ring, we will have done so because we think it enhances pricing and provides a growth route.”

But the plan has drawn the most criticism from physical metals brokers, who said the rise in volumes did not mean electronic pricing had been a success.

“Maybe they think there’s a huge volume of activity out there but we say: where is it? I just don’t see these volumes coming. I’ve been running a global LME business for 30 years and those who want to trade the LME are already trading the LME. We’re looking for it ourselves,” said the head of metals at a London brokerage, who spoke on condition of anonymity.

In the hedging world, the LME is a bit like a scalpel versus a Bowie knife used elsewhere

The LME was forced to release more specific data on the electronic closing prices last week. The data showed a more than 200 per cent rise in the number of “objections” made by members to the daily closing prices.

The LME’s electronic system, called LMEselect, does not work as well as human traders, according to one broker. “By all means shoehorn this into a fully electronic platform — the idea floor trading will finish one day is not lost on anybody, but today the alternative is not as good as nine guys with a pen and pad,” he said, declining to be named.

Brokers said that without the Ring they could not hedge metals prices and contracts to specific dates in the future. In other, highly automated markets such as oil, contracts are pinned to standard three-month increments.

“The LME is built for the metals market, it’s built for users to apply a very specific hedge,” said Michael Lockwood, a consultant and former Xstrata and Glencore executive who has been discussing the issue with customers. “In the hedging world, the LME is a bit like a scalpel versus a Bowie knife used elsewhere.”