UPDATE 3-Jefferies Bache to leave LME's open-outcry floor

Mon Nov 25, 2013 2:38pm EST

* Jefferies to keep 50 dedicated metals staff globally -source

* Broker will retain NY, London, Hong Kong metals offices

* Floor exit comes as customers favour electronic trade

By Melanie Burton

SINGAPORE, Nov 25 (Reuters) - After just 14 months, Jefferies Bache Ltd said it will leave the London Metal Exchange's open outcry floor, downgrading its exchange membership status amid a tough time for metals brokers battling with lower prices and higher fees.

The LME has one of the world's last open outcry exchanges and its owner, Hong Kong Exchanges and Clearing (HKEx) , which bought the LME for $2.2 billion last year, has guaranteed the floor will remain in place until January 2015.

Jefferies joined the LME floor last year, hiring traders from its competitors to debut in the top tier of the exchange's floor dealers, a year after buying veteran commodity futures brokerage Prudential Bache for $430 million.

The about-turn follows the abrupt departure last month of Mike Frawley, who spearheaded the bank's expansion after joining last summer from global broker and LME rival Newedge. The reason for his exit and his plans are not known.

Jefferies' decision to leave the floor and become a Category 2 member of the exchange to focus on electronic trade reflects a tough environment for metals traders, given falling prices and a still fragile global recovery while operating costs climb.

Category 1, or ring-dealing, LME members are entitled to trade in the open-outcry pit, electronically and over the phone. Category 2 has the same privileges at Category 1, except they may not trade in the ring.

The LME hiked its trading fees in the second half of last year as it sought to commercialise its business model while its clearing house LCH.Clearnet tripled clearing fees from June.

The exit is the result of rising demand for electronic trade and slowing appetite for floor-based execution, Jefferies Bache President Marc Bailey said in a statement on Monday.

"This decision is purely about best serving our clients' needs," Bailey said.

"Transitioning to a Category 2 membership will enable us to provide our clients with strategic expertise and seamless execution via electronic execution, which continues to gain market share, and floor execution."

As much as 80 percent of vanilla three-month trades are now transacted on screens, according to the LME. But some 80 percent of so-called "date spreads" are still executed on the floor or over the phone.

The decision also comes after the investment bank reported a 70-percent drop in net profit to $12 million in its third quarter to the end of August after unexpected increases in interest rates over the summer hurt earnings in its fixed-income division, which includes commodities, according to an earnings release.

Its fourth-quarter results will be released on Dec. 17.

Jefferies will maintain around 50 dedicated staff servicing its metals business, with offices in London, New York and Hong Kong, the source said. Jefferies employs a floor team of 8-10 people.

Jefferies' departure takes the number of LME floor dealing members down to 10. Barclays quit floor dealing this time last year.

Jefferies change in status takes effect immediately, the LME said in a notice to members on Monday.

FILED UNDER:
A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article