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10 August 2016

Pop-ups and Boutiques

I’ve spent the last week or so sailing, with limited access to emails and the internet, so I haven’t really been in close touch with what the markets have been doing - and, more importantly perhaps, I haven’t been able to get up to speed with the Olympics. But as I sat clutching the tiller, I did start to wonder about whether the trend towards the fragmentation of the market would last. I’m certainly not a denizen of the hipster enclaves of East London (Shoreditch, Clerkenwell, Dalston - or am I already out of date with those?), but the pop-up restaurants largely pioneered there seem to be spreading - to Brighton, anyway, if not yet Tunbridge Wells…it seems to be a well-set trend.

Will we see the same trend for small-scale, less bureaucratic outfits continuing in the metals business? While the number of LME Ring members may have declined to an all-time low of nine, at the same time there has been an increase in what we used to call I/Bs. I say used to call, because I suspect that now something like boutique brokerages would be a name more resonant of the times. It’s not too difficult to see why. As the big battalions switch more and more to an electronic-based business, it would be only natural for the senior (read, older) generation to feel that their lifetime of personal contact and customer knowledge is being usurped by the onward march of the clicking mouse. So how best to exploit the value of that knowledge and experience? Simply take the file of contacts and persuade them that they are better served by a person than a mouse and set up your own shop. It’s been a popular move in recent times, and the signs are that it has been a successful one, by and large. Those whom I know to have followed this course seem to have settled into a comfortable niche business.

Will it last? That’s the interesting question. I have a feeling that it is generational on both sides - client and broker - and that as a new, younger set of traders move upwards in the client firms, so the mouse will re-assert its dominance. Personal relationships have been an important part of the LME business for a hundred and thirty-odd years; however, the increasing part played in all our lives by electronic communication suggests to me that, sad though it may be, by the time the next generation has fully taken over, it’s going to be past its time.

Is the same true of the physical business? Well, the first part, certainly. The move of senior traders away from the well-known names, to set up their own boutique shops is clear and unambiguous. As big, very well-financed operations have begun to wind down, for a variety of reasons mainly around flat economies and increasing regulation, the number of small traders relying mostly on outside finance has burgeoned. The difference between this move and the LME shift I’ve referred to above, though, is in the actual trade. The LME is becoming ever more homogenised, and that leads directly to the world of electronic operations. I still believe that where we are heading (in financial markets generally) is towards an artificial intelligence-driven world of electronic algorithmic trading. (Just to be very clear: that is not what I particularly want to see, but it is what I expect to see….). But in the physical market, there is not the same degree of homogeneity; there, traders are dealing with real metal, with each parcel’s specifics and differences. 

So perhaps the two sides of the business are pointing towards different things. It may be a last hurrah for the broker boutiques, and the beginning of a path to growth for the independent physical traders.

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