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12 August 2021

And then there were eight....


This article was written by Martin Hayes. All views and opinions expressed are strictly his own.

Hot on the heels of the LME confirming that its new hybrid pricing structure – part open-outcry and part electronic screen – will start on September 9, Triland Metals, one of the nine remaining Category One Ring Dealers, said it would not be returning to the floor, and would become a Category Two Member.

Suddenly, the odds of the trading floor, which has been the last of its type in Europe for many years, having a long-term future widened considerably with the exit of a company whose floor status dates back to 1972.

In a customer letter – seen by the writer – Triland said that, given the LME’s direction of travel, it made more sense to deploy its resources away from the ring. This is the first departure from the floor since September 2015, when heavyweight JP Morgan withdrew.

In reality, and despite the odd addition or change of ownership, overall floor numbers have been declining for decades from the levels in excess of 30 since the 1970/80s heyday.

So the trend is clear, going forwards, and for the eight remaining Ring Dealers, the task of maintaining open-outcry after the 18-month pandemic induced closure has just got much more difficult, given some of the conditions attached to the new pricing process for the floor sessions.

The kicker is that Ring Dealer numbers must not fall below six, while trading volumes of those members must not fall below 75% of the total second ring turnover of the last full pre-Covid 19 year. It may not be simply a case of subtracting Triland’s turnover from that equation, but the likelihood is that the remaining eight will not contribute as much as the nine would have done.   

The LME has tried to sweeten the pill to some extent. Attendance for open-outcry – a dealer must actually sit in the ring - will only be mandatory during the Official Pricing session, which would allow for greater staffing flexibility for a firm’s resources. And there will be a 12-month Transition Fee rebate for the ring-dealing companies.

But that does not really address what the world of financial business, commodities and metals trading will have evolved into five or ten years from now. The greater enforced emphasis on the environment will see more focus on recycling and cleaner production methods away from exploiting and mining primary resources. 

As well, and as a result of the pandemic, the practice of home/office working will become more commonplace. As has been noted before, it is expensive to maintain a floor trading operation five days a week. If business levels dwindle, then those costs will become prohibitive for some firms.

It is a little bit surprising that the current debate on open-outcry trading has been more prominent than the other elements of the LME’s Strategic Pathway. In the near ten years since HKEX bought the LME, the exchange and its three CEOs have been tasked with adapting and changing what is a uniquely different trade-orientated market to the 21st century financial ecosphere.

These include addressing whether the LME is a forwards market, as opposed to a futures exchange, or a combination of both. Additionally, how should the LME margin and regulate its market positions? Likewise, how does it serve the mining and end-use sectors, as well as catering to financial interests?

And running across all of these issues - open-outcry included – is the inexorable shift to electronic trading, computer generated strategies and inter-linked relationships with the wider financial markets.

The LME cannot exist in splendid isolation as a pure industry model anymore. Many other global exchanges and commodity markets have faced similar challenges and adapted to the extent, where business, market movements and participants have evolved away from the pure commodity.

In coffee markets the importance of Brazilian frosts, bean gradings and roasting patterns is no longer prominent to the extent they were in the last century. Similarly, cocoa grinding numbers and cane and beet sugar crop production estimates are not the influences they used to be for those commodities.

It is noticeable, too, that many of the former big companies that dominated soft commodity trading are no longer around or much diminished. 

Almost inevitably, that will be seen in the world of metals as well. Triland Metals, a subsidiary of Mitsubishi, will of course trade as Category Two member on the screen for now.  

But for LME ring numbers the recent years provide plenty of examples of former open-outcry stalwarts disappearing into the mists of history. Who now remembers, HP Thompson, Associated Lead, Lazarus Metals, Cominco, to say nothing of the likes of Anglo Chemical, Rudolf Wolff, Phillip and Lion and Brandeis?

In just over three weeks time, eight firms will once again sit on the red leather benches and the bells will ring every five minutes. But how long will it be before eight becomes seven, then six, now that the direction of travel is ever clearer?



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