May 14, 2020 / 1:43 PM / 2 months ago

LME dealers take to the phones in fight to save LME ring

* Ring members worried digital success will make ring redundant

* Dealers shift ring trades to phone bartering

* LME dropped planned electronic matching system

By Eric Onstad

LONDON, May 14 (Reuters) - Wheeling and dealing that used to take place in the London Metal Exchange ring - the last open-outcry floor in Europe - has shifted to the phone as dealers resist an advertised shift to electronic trading in a fight for their jobs.

The 143-year-old LME temporarily closed its ring, a circle of padded, red-leather benches, on March 23 when the coronavirus lockdown began.

It was the first closure since World War II at the world’s biggest market for industrial metals and ended the theatre of arcane hand signals and frenzied shouting by ring traders.

The LME said it will re-open the ring, but many worry that the closure will become permanent if digital trading succeeds.

So to stay relevant, dealers have shifted trade to telephone bartering. At the same time, leading members have managed to axe a new electronic system for closing prices.

“The floor was quite quick to react to say okay we’re going to work as if we’re in the rings so we’re going to be calling around,” a trader at a ring firm said.

“Although it’s working without the floor, a lot of these trades are being done manually.”

The trader and other sources declined to be identified because they were not authorised to speak to the media.

The LME is unique among exchanges in that it allows users to lock in prices for individual days for the first three months forward and weekly up to six months - meaning there are hundreds of potential dates to trade and adjust.

Many of those trades, referred to as carry trades, are being matched through inter-office business and later entered in the LME’s electronic Select system.

“Select is not made for those kind of trades. The thing that the ring is good for is allowing you to shout out a random carry date order and that gets voiced all the way through the eco-system,” an analyst said.

The ring closure has prompted the bid-offer spreads to widen, especially on further forward contracts, an executive at a ring-dealing firm said, which can mean customers have to pay more.

DIGITAL SYSTEM THWARTED

Already the ring is a small club with only nine LME Category 1 members allowed to trade in the arena, where the complex trades to adjust contracts generate extra revenue.

Worried a successful shift to digital trading would kill the open outcry ring, top LME members prevented the use of a new Trade at Settlement (TAS) system during the closure, industry sources said.

“I think the fears of the ring dealing members were if the TAS started working correctly and everyone was using that, what is the use for the floor then?” one trader said.

The LME, owned by Hong Kong Exchanges and Clearing Ltd. , conducted a trial of its TAS electronic order book system last year but decided in February to retain floor trading to set final prices of the day.

The exchange was set to revive the system in March when it closed the ring.

“Following a comprehensive discussion at the LME User Committee, the LME is now not proposing to proceed with this TAS deployment,” the LME said in a statement, adding the committee believed the current pricing mechanism was working.

The ring has its roots in the early 19th-century when the Royal Exchange, the world’s first commodities market, became so crowded that metal merchants gathered at the Jerusalem coffee house on Cornhill in the City of London to conduct business.

Britain this week began cautiously to ease lockdown measures, but there are no plans yet to re-open the ring.

“We – with the support of the majority of our ring dealing members – do not currently plan to re-open the ring until such time as it would be consistent with the government’s social distancing guidance,” the LME said. (Additional reporting by Pratima Desai; Editing by Veronica Brown and Barbara Lewis)

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