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09 June 2021

Compromise - not a dirty word?


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


All being well, the LME ring will re-open for business on September 6, the bells will ring every five minutes, the screens will light up again, and what could have been the lost art of open-outcry trading will make a triumphal return.

On Tuesday, the LME made what looks like a compromise to original plans to close the trading floor in Finsbury Square for good, and maintain current electronic business on Select, which has been in place since March 2020.

Instead, in its outcome to the much talked-about and argued Discussion Paper on Market Structure, the LME opted to maintain open outcry trading for the Official Ring pricing sessions – which run from 11:40 local to 13:35. The Official Prices arrived at during this time have traditionally been used in the vast majority of real-world physical contracts. 

Discovery of the Closing Prices, which for the most part form end-of-day portfolio valuations and are used for margining, will remain on Select – so the 15:00-17:00 floor session does not return. Also, the LME, via a working group, will look at the methodology for arriving at these key prices, with another consultation process in the latter part of 2021.

When the LME proposed a full and permanent closure of the floor in April, it received a larger-than-usual response to its plans – a record 192 respondents. Opposition to the floor closure was more widespread than perhaps anticipated, and not just largely confined to the current nine Ring Dealer Members (RDMs) and traditionalists.

On the face of it, the outcome just announced looks like all the arguments have been heard and taken on board – the Official Prices, which are largely geared towards the broader metals industry come back onto the floor.

Meanwhile, end-of-day Closing Prices, predominantly favoured by financial participants, remain on the more accessible electronic platform.

That appears to be something for everyone and a pragmatic solution to widely differing starting viewpoints that could not be totally reconciled – but is the glass half full or is it half empty for traditionalists and floor trading adherents?

It is worth remembering that prior to the pandemic-enforced closure last March, the LME open-outcry sessions for all their showy theatre – morning and afternoon – comprised perhaps less than 10% of total daily business. Critically, however, the prices and settlements discovered through floor trading are the most important for all LME participants. 

LME CEO Matt Chamberlain believes that these changes are for the longer-term, and that he hopes that the LME floor will be around in 10 to 20 years time.

But that depends on many variables – data on volumes pre-closure, during the pandemic shutdown and post-September will undoubtedly be one factor. As will be whether competing financial and metal exchanges make inroads into overall LME turnovers.

However, the key element in this may well be the attitude and approach of the nine LME RDMs themselves – they have to make the truncated open-outcry sessions viable, both on turnover grounds and price discovery validity.

And that is not the only consideration.

It is an expensive business maintaining a floor trading operation, which in the past was sustained by traders and clerks, for the most part, working in the office during the morning pre-market, then spending the rest of the day staffing the floor. In general, more hours were spent on the floor than in the office at the desk. 

Now, the reverse is likely to apply, and the RDMs and their teams could well find themselves shuttling backwards and forwards between office and floor twice a day. Add in the overall changes to working patterns caused by the pandemic – working from home has become widespread – and some of the nine might have second thoughts about a long-term floor operation.

Juggling a five-day office working week, which this modus operandi really requires, with a likely shift to a mixed office-home work balance might eventually tilt some towards reconsidering their RDM status – remember, back in April not all nine were totally against the floor being closed.

There are no hard and fast rules about what comprises a quorum where the floor is concerned – 40 years ago there were some 30 open-outcry trading firms jammed into the seats. There have been nine for several years now, which has not had a detrimental impact on trading and price relevance.

That could change, however, if one or two firms leave and then the exit becomes an exodus. Also, there is more likelihood that closing prices could become distorted if liquidity and numbers drop significantly.

The LME is now looking at bringing in criteria and a mechanism on it having the power to close the floor and switch to the screen without further consultation.

That is all for the future, however. For now, there will be a re-start in early-September, with, if all goes well on the vaccine/pandemic front, a more normal LME Dinner week in London the following month.

Beyond that, though, it will be all to play for as to whether open-outcry trading continues much longer in the 21st century – all other major bastions around the world having largely succumbed to the march of the screens years ago.


    


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