UPDATE 3-Barclays quits London Metal Exchange open outcry trade

Thu Nov 22, 2012 10:50am EST

* Barclays seeks to cuts costs, increase efficiency

* Decision comes at tough time for banks in commodities

* LME ring still seen robust, plans for Asian time zone trade

By Eric Onstad and Melanie Burton

LONDON/SINGAPORE, Nov 22 (Reuters) - Major commodities player Barclays quit open outcry floor trading at the London Metal Exchange (LME) on Thursday, downgrading its membership at the world's biggest marketplace for industrial metals to cut costs.

The commodities operations of banks like Barclays face tough times and total commodities trading turnover for the 10 biggest investment banks has tumbled 20 percent in the first nine months of this year.

The British-based bank in particular suffered heavy losses in metals trading last year after it took bets in copper and aluminium that went wrong when markets lurched lower.

The LME, in the last stages of a $2.2 billion takeover by the Hong Kong Exchanges and Clearing Ltd., said in a statement Barclays had changed its membership status to Category 2, which allows only electronic and telephone trading.

Category 1 gives members the right to take part in open outcry trading at the LME building in London's Leadenhall St, which grants them greater visibility and immediacy, but brings costs roughly double those of dealing electronically.

"Barclays remains deeply committed to the base metals market and the London Metal Exchange, which is one of our oldest and most successful franchises within our commodities business," the bank said in an emailed statement.

Some traders said Barclays' departure was bad news for LME efforts to preserve open outcry trade - increasingly a rarity in financial markets - which was strengthened with the recent entry of Jefferies Group after French bank Natixis pulled back from commodities broking.

"They (Barclays) are one of the large brokers on the exchange and they give liquidity to other brokers on the floor," a senior source at a Category 1 broker said.

"It is quite expensive to become a Cat 1 member. Their business still needs to be transacted and they will use other brokers no doubt but it's not a good day for the exchange."

Others were more sanguine on the move.

The vast majority of Barclays metals trading already flows through the bank's own electronic trading platform, BARX, a source close to the bank said.

There has long been speculation on the future of the LME ring, a circle of red leather benches where traders in business suits make arcane hand signals to their teams as they trade a range of timespreads as well as benchmark futures in metals also including tin, lead, zinc and nickel.

On Thursday morning, the ring-side booth formely occupied by Barclays was deserted, even as noisy trading continued.

Expectations that the LME ring will persist have also grown as market participants speculated that Chinese companies would take up floor trading as the exchange changes owners.

"There is talk of other people being interested, a China bank is being mentioned," said a trader on the LME floor. "Ring traders come and go, and I'm sure their place will be taken up at some point."

Senior trading sources said the LME may add morning rounds of open outcry futures trade aimed specifically at Asian markets as the new Hong Kong-based owners plot their strategy to fend off competition from the Shanghai Futures Exchange.

Introducing a third, earlier, round of trading sessions would be the biggest shift in the way the 135-year old exchange operates since the launch of its electronic platform over a decade ago, and would run counter to a global trend of shutting trading pits in favour of faster, cheaper alternatives.

METALS LOSSES

Barclays had been a star of commodities trading among European banks over the past decade but was overtaken by Deutsche Bank last year after its losses in metals.

In the third quarter, however, Barclays said commodity income rose. Total fixed income, currency and commodity revenue increased 11 percent, but it did not provide a breakdown.

The head of metals trade at Barclays and a colleague left it last year after losing tens of millions of dollars on LME copper, compounded by losses on aluminium futures.

Barclays would not specify the scale of the losses but said they were not "big" and that there was no abnormal trade, a reference to rogue trading.

Barclays combined its base and precious metals trading operations earlier this year under a new head, Cengiz Belentepe.

Some banks such as UBS and RBS have departed commodities trading and others are being hit by tighter regulations and demands for higher capital reserves.

A source close to Barclays said that, far from abandoning metals trading, the bank was joining other major investment banks such as Goldman Sachs and Morgan Stanley, which have strong metals trading operations without the expense of participating in LME rings.

"It's a sign of the times. They (Barclays) believe that focusing on electronic trading is a logical evolution of the business and will allow them to be more cost effective for clients," the source said.

Barclays has no plans to change its stake in base metals warehousing firm Erus Metals, which is further evidence of its commitment to the sector, the source added.