LONDON (Reuters) - Electronic trade on the London Metal Exchange has climbed by nearly a fifth this year as the LME lures more speculators, sparking a battle with members who worry about threats to the traditional structure symbolized by the open outcry floor.
The 139-year-old exchange, the only one in Europe still maintaining open outcry trading, has been seeking to placate members, especially brokers, worried about losing lucrative business.
Many of them say it is foolhardy to shift away from long-established clients such as miners and fabricators.
“There are some pretty annoyed people out there, to put it mildly, among the old LME camp, while others are saying the LME has to move forward,” said Robin Bhar, head of metals research at Societe Generale in London.
“If you give people more direct access in this new model, there’s no need for the brokers, so they have to be protective of their business.”
The tension was highlighted when a former LME chief executive said earlier this month he was holding talks with trading houses and brokers about launching a new London-based metals trading platform in a challenge to the LME.
The LME declined to comment, but industry sources said exchange executives have strongly defended the new scheme, telling members they want to keep the traditional structure along with the enhancements.
The LME, which recently opened a new trading floor, has said it was committed to open outcry trading as long as clients still wanted the traditional format, where deals are struck in intense five-minute bursts of yelling and arcane hand signals.
The changes, however, are part of the LME’s “Liquidity Roadmap”, which encourages hedge funds and computer-based trading firms to trade more on the exchange.
While overall LME daily average volumes have slid by 9.6 percent during the first five months of the year amid a slump in commodity markets and an LME fee hike, turnover on the LME electronic Select platform is up 19 percent through mid-June.
The LME, owned by Hong Kong Exchanges and Clearing Ltd, says this is because its new scheme has added 144 liquidity providers and 495 new market participants.
In some cases, black-box trading firms such as Chicago-based Jump Trading have become members and can funnel their business directly onto the LME, no longer needing to use brokers.
“I think we’re going down a very dangerous path,” said the head of the LME Desk at a broker who declined to be named.
Also provoking opposition is the LME’s campaign to encourage more trading of standard monthly futures by clients put off by the traditional set-up which allows trading any single day for the first three months.
Much of the traditional trading takes place on the open outcry floor.
The so-called “date structure” was set up to allow miners and industrial consumers to hedge physical shipments for odd periods, but the LME says this discourages funds who prefer trading based on single monthly expiry like other futures exchanges, such as U.S. rival CME.
Standard monthly trading in aluminum, copper and zinc for the first two weeks in June was a combined 4,031 lots, more than the volume for the whole of the previous month.
The turnover is still miniscule compared to overall electronic volumes, which totaled 494,593 lots for the three metals during the same period in early June, but opponents are concerned that it could gain momentum, leaving the traditional model favored by miners and industry with scant liquidity.
“I‘m not promoting it because I actually feel there’s no evidence at the moment this will be a benefit to the long-term betterment of the exchange,” said Michael Overlander, chief executive at Sucden Financial, one of nine top-tier LME members allowed to trade in the open outcry ring. “But if the market itself decides that’s where it’s going to go, then of course we’ll have to follow it.”
Reporting by Eric Onstad; Editing by Veronica Brown and David Evans