* LME CEO expects more reference prices will be set by exchanges
* LME's open-outcry trading good example of transparent price setting
* CEO believes LME can improve on current silver fix system
By Eric Onstad
LONDON, June 10 (Reuters) - The global gold price setting benchmark or "fix" is open to manipulation, said the head of the London Metal Exchange (LME), which is competing to offer an alternative to the silver fix when the system is disbanded in August.
The gold and silver fixes, along with other commodity benchmarks, have come under increasing scrutiny by regulators in Europe and the United States since a London Interbank Offered Rate (Libor) manipulation case last year.
"When people sit around a table and lift a flag in the gold market and say this is where the price is, obviously it is open to manipulation if it's done in this opaque way," LME Chief Executive Garry Jones told a conference in London on Tuesday, giving no further details.
The gold fix - a benchmark widely used across the industry - is set twice a day by banks that get together over the telephone to work out a standard price for the metal based on transactions between their clients.
Flags were used when fixing members met in a room in London - unlike now when the fix is conducted via a conference call. If a member needed a pause in the fixing process in order to recalculate their overall selling or buying interest they would raise a small flag on the desk in front of them and then lower it when they were ready to continue with the process.
Flags are no longer used, but a fixing member may still call "flag" if they need a short pause to recalculate their overall interest which brings the fixing to a temporary halt. During that time the chairman cannot fix the price.
Jones said the LME system of open-outcry ring trading was a good example of transparent price setting.
"I think more of the reference prices will be set by exchanges... a neutral independent place where transactions happen," he said.
Deutsche Bank said in January it was pulling out of the group of banks that set the benchmarks for gold and silver prices, reducing their number from five to four.
The move to disband the silver fix came after Deutsche Bank failed to attract a replacement after putting its fixing seats up for sale.
Barclays Plc, one of the four remaining fixing member banks, was fined 26 million pounds last month for failures in internal controls that allowed a trader to manipulate the setting of gold prices, just a day after the bank was fined for rigging Libor interest rates in 2012.
Last month, London Silver Market Fixing Limited said it would stop administering the benchmark on Aug. 14.
The LME and the Chicago Mercantile Exchange (CME) both said last month they were working with the London Bullion Market Association (LBMA) and the precious metals industry to find an electronic-based solution to the silver fix when the century-old system is disbanded in August.
Jones did not give details of the solution for the silver fix to be offered by the LME, owned by Hong Kong Exchanges and Clearing Ltd, but sources have said it is transaction-based.
"We think that going forward can improve the situation there is at the moment. We have all the resources, the regulatory overview and obviously we have 137 years of metals experience," he told reporters following a panel discussion at the International Derivatives Expo in London.
Reporting by Eric Onstad; editing by Susan Thomas