(Repeats with no changes. The opinions expressed here are those of the author, a columnist for Reuters)
LONDON, Nov 4 (Reuters) - In the end it turned out all right on the night.
There was no booing and no slow handclapping when Garry Jones, chief executive of the London Metal Exchange (LME), rose to address the exchange’s annual black-tie dinner at the Grosvenor House Hotel in London.
There had been considerable speculation as to what sort of reception he would get after a year of falling exchange volumes and a protracted dispute with brokers over trading fees.
But decorum was maintained and Jones was in conciliatory mood, accepting with “some humility” that things hadn’t gone “as well as we hoped”.
He and his boss, Charles Li of Hong Kong Exchanges and Clearing (HKEx), then had to humbly listen as Michael Farmer, guest speaker and copper market legend, spelt out exactly why the exchange’s traditional users are so unhappy.
Well at least the two sides can talk about their differences, which as every counsellor will tell you, is the key to resolving marital problems.
Four years on from the nuptials between HKEx and LME, however, it is clear that relations need something of a reset.
Because, as Farmer pointedly noted, “there are many exchange competitors and even some here in London who are waiting in the wings and would be very happy to take over the mantle of the LME” as global price setter for industrial metals.
WHOSE MARKET IS IT ANYWAY?
Michael Farmer is a member of Britain’s House of Lords and he has lorded it over the copper market for decades, most recently through the Red Kite Group he co-founded.
He is the living embodiment of the type of trader-merchant that has formed the back-bone of the LME since its inception in the 19th century.
No better person, in other words, to articulate the frustrations that have been simmering between exchange and users over the last year.
And he didn’t disappoint, highlighting three areas that “need constant care and attention” if the LME is to retain its historical relevance; fees, regulatory creep and the exchange’s embrace of new electronic players, particularly those of the high-frequency variety.
It was the first and the third that elicited the most cheers and applause in the Grosvenor’s Great Ballroom.
The LME has reversed some of the fee hikes imposed at the start of 2015, particularly those on the short-dated spreads.
But “many users will still find the cost of trading to be high and I would strongly recommend the LME to consider further reductions to attract liquidity back.”
Faced with falling volumes, the LME has been trying to entice more liquidity from proprietary electronic traders such as Jump Futures, the Chicago algo house which has recently become an exchange member.
Industrial users and brokers alike fear that such 21st century incursions are themselves part of the problem.
Farmer’s contention that high-frequency trading “could be described as front-running”, a now illegal practice of prioritising in-house orders over those of the customer, is a widely held view among LME brokers.
In short, according to Farmer, “an exchange, whose first priority is to serve the needs of its users rather than its own needs, will find that by so doing, it will be serving well its own needs too.”
FROM HONG KONG WITH LOVE
At the heart of this discontent sits the LME ring, one of the last open outcry trading forums anywhere in the world.
The ring is still the fulcrum of the LME’s uniquely peculiar multi-date spreads and is the last human hold-out against the algos and high-frequency traders that have come to populate other parts of the LME ecosystem.
And HKEx’ Li was at pains to point out that rather than seeking to kill off such historical relics, the LME’s “tradition is why we’re here”.
Indeed, he came to London bearing a little gift of reconciliation. HKEx likes the LME ring so much it has made a replica one to grace its new Qianhai metals exchange in mainland China.
It was a nice gesture.
But one that can’t fully disguise the fact that HKEx has struggled to fulfil its part of the marriage bargain by opening up the Chinese mainland to LME players.
Spurned by China’s Shanghai Futures Exchange, HKEx is now having to creep onto the mainland, forming its own spot metals platform and using its “Shield” warehouse certification initiative as a proxy for full LME warehousing.
But then, as Li said, “things happen in China that we do not fully anticipate and we do not fully control.”
A NEW DAWN?
Of course, it’s the things that the LME and its HKEx masters can control that are the source of all the unhappiness back in London.
The LME is showing signs of listening.
The incentives aimed at attracting electronic liquidity are under review. If something similar is happening on the fees front, the LME is not saying so publicly.
New contracts are being assessed, specifically ferro-chrome and the much-touted metal of the future, lithium.
The problem for the LME is that it’s not the only exchange player launching new contracts.
CME Group was in town and announced the launch of gold and silver spot and spread contracts, a grab for the same bullion space targeted by the LME itself.
The U.S. exchange also announced the extension of its physical delivery network to Asian locations for its lead contract.
It’s an increasingly aggressive challenge to the LME’s historical franchise.
It may not be the only one but there was no visibility this week on the potential alternative metals trading platform being studied by former LME executive Martin Abbott at the behest of several LME brokers.
The best bit of news for the LME last week was the confirmation it had received “Foreign Board of Trade” status from the CFTC, allowing it to offer electronic trading and order matching in the United States.
The CFTC had used the approval process to put pressure on the LME to reform its warehousing network after a concerted lobbying campaign by U.S. aluminium users unhappy with the long load-out queues at Detroit.
The regulatory sign-off marks the closing of a particularly painful chapter for the LME.
It’s the next chapter, though, that will determine the long-time success of the Hong Kong-London marriage.
The ever ebullient Li noted that the next Chinese zodiac year is that of the rooster, which “tells us a dawn is coming”.
But if it’s to be a new golden dawn for HKEx and the LME, Li would have heard enough this week to know that it might take more than a replica ring in Qianhai to reset an increasingly strained marriage. (Editing by David Evans)
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