UPDATE 2-London Metal Exchange to keep open outcry ring

Mon Jun 23, 2014 7:17am EDT

* Decision follows review after takeover by HKEx

* To invest £1 mln in new technology for ring

* LME only market in Europe still using open outcry

* Hope for new ring members after decision (Adds comments by LME executive)

By Eric Onstad

LONDON, June 23 (Reuters) - The London Metal Exchange (LME) will keep its open-outcry trading ring, it said on Monday, bucking a trend by most other markets to shift to all-electronic operations.

In the ring, a circle of padded red-leather seats, traders use arcane hand signals during five-minute bursts of intense trading in copper, aluminium, zinc, lead, nickel and zinc.

The LME, the world's oldest and biggest market for industrial metals, launched a review of whether to keep the ring following its takeover by Hong Kong Exchanges and Clearing Ltd in December 2012.

The 137-year-old LME, the only European financial market to still use open-outcry trading, also said in a statement it would invest 1 million pounds ($1.70 million) in technology for the ring.

"The LME will continue to host the ring, with its robust and transparent price-discovery process, for as long as the market needs it," Chief Executive Garry Jones said.

While much of the LME's volume has moved to its electronic platform, LME Select, many participants regard open outcry trading as useful for setting benchmark prices and for trading the LME's complex date structure.

NEW RING MEMBERS?

The LME has 11 firms that trade in the ring, down from about 30 during a peak in the late 1980s, but the exchange hopes more will join.

Some companies have recently expressed interest, but they have not indicated whether they were considering ring dealing or a lower category of membership, Chief Operating Officer Stuart Sloan said.

"Clearly the market had a little bit of uncertainty hanging over it while we've been conducting this review and analysis," he told Reuters in an interview.

"So hopefully the clarity that we're announcing today should help potential members make decisions."

As part of its new spending, the LME will add new wall boards on the trading floor with enhanced technology to help integrate electronic and open outcry trading.

"It will help the ring dealers be fully aware of what is going on in the Select market and take that into account in their trading," Sloan said.

The exchange said it will keep a close eye on the integrity of the ring following increased scrutiny of commodity benchmarks by regulators in Europe and the United States since a London Interbank Offered Rate (Libor) manipulation case last year.

An internal audit found that the ring meets the principles for financial benchmarks outlined by International Organisation of Securities Commissions (IOSCO)- a global umbrella group for market regulators, the LME said.

"In essence, we're pretty positive about the integrity of the process that we have there. We'll always be looking to make sure it's as good as it can be and at times there'll be things we can improve, I'm sure," Sloan said.

Last week, the LME proposed using the ring as one of three alternatives to replace the 117-year-old London silver price benchmark, or fix.

The ring has its roots in the early 19th century when the Royal Exchange, the world's first commodities market, became so crowded, metal merchants gathered at the Jerusalem coffee house on Cornhill in the City to conduct business. ($1 = 0.5876 British Pounds) (Reporting by Eric Onstad, editing by Louise Heavens)