- Lord Copper
Electronic Trader Discounts – the Beginning of Attrition?
German military strategists from Bismarck onwards were very clear that the most serious error they could make when plotting their moves to consolidate the security of the country/expand the empire/seek Lebensraum (different objective at different times – take your pick) would be to saddle themselves with the need to fight a war on both sides of the country – simultaneously an Eastern and a Western front. Despite the Schlieffen Plan, designed to avoid this fatal splitting of their own forces, they were in fact singularly unsuccessful in achieving their objective. In 1914, particularly, they ended up with exactly what they didn’t want and had to put armies at the same time in both the west, where they met the French and the British, and the east, where their Austro-Hungarian allies were unable to resist the Russians on their own.
Now, far be it from me to compare the LME with German High Command, but nevertheless the management of the Exchange do seem to be in a position where they are conducting two campaigns at the same time. On one side, they are pushing ahead with their expansion into the (Chinese) retail market, and on the other, they are doggedly fighting to convince the traditional parts of the business that they are not about to surrender the Ring and give up date trading and those other little wrinkles so beloved of the long-standing parts of the business. It wouldn’t be fair to suggest that the requirements of the two groups are incompatible, but it is a fine line to tread. Simplicity, speed and low cost are the targets of the retail investor, whereas the traditionalists are more concerned with being able to package things together in the way that best mirrors (and thus hedges) their physical trading operations.
As a commercial enterprise, the LME cannot afford to stand still; shareholder expectations need to be met. So right now, in a period of relatively slack industrial demand and market usage, the best place to look for the growth needed to keep things rolling on is going to come from the non-traditional sector. That makes sense; if the trade is quiet, then it’s perfectly logical to look elsewhere to bring in new volume. That’s why the LME has been introducing things like the electronic trader programme, which will offer discounts to market users (client users, not members) who electronically trade outright three months and third wednesday dates (or the carries which adjust positions to turn them into third wednesday trades). Now, the general consensus is that the LME is a relatively expensive market to trade, so these discounts are a way of bringing costs into line with some of the competition, without having to reduce fees across the board.
All Quiet on the Western Front?
Well, that may take care of the campaign in the east, for the moment, but I’m not so sure that it’s all quiet on the western front. Why? Look at it this way: reducing fees for direct client trades on Select means that the business bypasses the conventional access route to the market through a broker (LME member) and that therefore that broker will not have the opportunity to make a profit from the trade. We all pretty much accept that the potential profit benefit of straight outright three months client trades has been eroded to virtually nothing over the last few years, but the inclusion in the discount programme of carry trades is significant; they form a substantial part of a broker’s income. They are not going to be best pleased at seeing that income drying up because of a policy deliberately created by the body of which they are members. It is of course true that nothing stands still, and that we all have to adapt to change and the LME, I guess, is working on the basis that a rising tide lifts all ships and that volume begets volume, so as we go forward, the pie to be shared gets bigger which helps everybody. Mmm. Volumes at the last count were down, so that one is still open to question.
Broking has been a good business – but it has its ups and downs. Seeing the LME, now a commercial enterprise (some could suggest a competitor, in a way), effectively squeezing its members to strengthen its own position is a strange picture. If we are – as many suspect – in a prolonged period of restrained industrial activity, with a concomitant calm in the traditional metal industries, then it’s difficult to see brokers being happy with a situation where a greater and greater proportion of trades bypass them and yet they are still expected to provide credit and clearing facilities. Let’s hope the western front doesn’t develop into a war of attrition, as we remember the hundredth anniversary of that archetype at Verdun.