The London Metal Exchange announced plans to reopen its iconic open-outcry trading floor on 6th September 2021. Initially, the exchange announced that it would be keeping the pit closed permanently, which led to backlash from major users.
Known simply as the ‘Ring’, the pit dates back to the industrial revolution. It is famously recognised as a circle of red leather couches around which traders barter metals like copper and aluminium. The exchange caters to producers and consumers of physical metals.
It closed in March 2020 for the first time since World War II due to coronavirus social distancing rules.
The London Metal Exchange (LME) is the world’s oldest and largest marketplace for industrial metals. It is also the last open-outcry venue in Europe. So, it stands to reason that there would be resistance when in January 2021, a consultation process was launched to close the ‘Ring’ permanently.
The LME cited its digital success as the reason behind its planned closure. COVID-19 restrictions forced the transition to online trading in March last year. According to reports, the success of the migration is the reason for the new solely digital proposal.
In its consultation paper, the LME also proposed a change in the methodology for calculating margin payments. Currently, the exchange uses a contingent variation model (CVM) and suggested moving over to a realised variation model (RVM).
Members of the exchange have stated that it will continue to work with the CVM in the “medium term” while looking into the feasibility of implementing the alternative. Those who participate in trading physically prefer CVM because there’s no need to manage cash flows daily. Instead, it’s only necessary when the contracts expire.
Chief executive of the LME, Matthew Chamberlain, said, “The divergent views in response to the discussion paper were particularly apparent between traditional participants and some smaller physical clients on the one hand, and our larger merchant trader and financial participants on the other.”
The LME received a staggering 192 responses to its proposal. Traders and brokers were quick to let their frustration known. Many believed the market was using COVID-19 as an excuse to close open-outcry trading.
Traders told The Evening Standard that the LME’s proposed electronic version of trading would not cope with the unique complexity and flexibility that the ‘Ring’ offers customers. The LME operates differently from any other market in the world – it prices metals contracts to any future date the client wants. That provides a degree of variability that requires human input to get accurate prices.
There is also concern that if the LME were to go completely digital, it would lose its unique edge, potentially driving business away from London. Whether or not the city can maintain its position as a major financial hub is already being questioned over Brexit.
In addition to this, the LME sets benchmark prices for metals around the world. Should it change how it operates, exchanges in China or the US could potentially take this over without the unique input of the ‘Ring’.
The LME’s U-turn on its proposed closure is a victory for traders. Doubts have been circulating the future of the ‘Ring’ since electronic trading successfully took off on the LME in the early 2000s. It has endured far longer than expected and continues to do so.
However, members of the exchange continue to examine different aspects, like its method for calculating margins. Whether they will come up with more proposals for change remains to be seen, but traders can count this as a win for now.
Legal disclaimer: The material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instruments. UR Trade Fix Ltd accepts no responsibility for any use that may be made of these comments and for any consequences resulting in it. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk. The analysis does not involve any specific investment objectives, financial situation and needs of any specific person who may receive it. Past performance does not constitute a reliable indicator of future results and future forecasts do not constitute a reliable indicator of future performance.
It has not been prepared in accordance with legal requirements designed to promote the independence of research, and as such it is considered to be marketing communication. Although we are not specifically constrained from dealing ahead of the publication of our research, we do not seek to take advantage of it before we provide it to our clients. We aim to establish, maintain and operate effective organizational and administrative arrangements with a view to taking all reasonable steps to prevent conflicts of interest from constituting or giving rise to a material risk of damage to the interests of our clients. We operate a policy of independence, which requires our employees to act in our clients’ best interests when providing our services.