Bloomberg Best of the Year 2017: Traders react on the trading floor of the open outcry pit at the London Metal Exchange Ltd. (LME) in London, U.K., on Monday, July 31, 2017. Photographer: Jason Alden/Bloomberg
The Ring at the London Metal Exchange is the last open-outcry trading venue in Europe © Bloomberg

The London Metal Exchange has proposed permanently shutting its Ring, where metals have been traded since its founding in 1877, a move that would mark the end of in-person trading of commodities in Europe.

The exchange’s plan, which was announced on Tuesday, comes after it temporarily halted trading in the Ring last year because of the pandemic.

If the LME’s members agree to its closure, it would mark the end of an era for the Hong Kong Exchanges and Clearing-owned exchange. The red sofa Ring is the last so-called open-outcry trading venue in Europe, where traders still communicate through shouting or hand movements. It traces its origins to a time when metals merchants would draw a circle on the sawdust floor of a City of London coffee house in the 19th century to begin trading. 

Traders dealing in copper at the London Metal Exchange, UK, 25th April 1966. (Photo by Victor Blackman/Express/Hulton Archive/Getty Images)
Traders deal in copper at the LME in 1966
The Ring is known for its sharp-suited men and its strict rules on dress code and conduct

Tuesday’s move by the LME is also a belated acceptance of the dominance of electronic trading that has led to many futures exchanges shutting their trading floors over the past decade. The New York Mercantile Exchange’s last traders departed in 2016.  

The LME’s Ring is known for its sharp-suited men and its strict rules on dress code and conduct, a breach of which could lead to fines. Prices for metals such as copper, zinc and aluminium are set in frenetic five-minute trading sessions by traders — almost all men — who shout out orders and use hand signals to convey information.

“It's a piece of history that sadly will be going, but at the end of the day we’ve all managed very well,” Malcolm Freeman, a director at Kingdom Futures, who started his career as a Ring clerk in September 1974, said. “It’s electronic, it’s a fair representation — I haven’t heard one customer complain about it. The one loss is the sense of the LME Ring as a community.”

Matthew Chamberlain, chief executive of the LME, said the pandemic had forced the exchange to test whether electronic trading worked as well as the Ring for setting its daily closing prices. It found that trading volumes actually increased compared with the Ring over the past 10 months, he said.

Bidders at the LME in October 1977 © Ian Tyas/Keystone Features/Getty

“The LME believes it is the right time to consider the permanent closure of the Ring and a move to an electronic pricing structure,” Mr Chamberlain said. “This shift is expected to benefit the market by broadening direct participation during the price discovery periods and increasing overall transparency.”

The LME, which was bought by HKEX for £1.4bn in 2012, has faced growing competition in recent years from the CME Group’s copper futures contract, as well as the Shanghai Futures Exchange’s metals contracts. While LME’s overall trading volumes fell 7 per cent last year, Mr Chamberlain said this was due to macroeconomic factors and was similar to other commodities exchanges.

“We have been clear that we will not use the pandemic as a pretext to close the Ring, and we remain committed to this,” Mr Chamberlain said. “However, it is fair to observe that this period of electronic pricing has served the market well, with consistently high volumes of activity in the pricing window, easily observable by all stakeholders, and more participants with direct access.”

Buying and selling metals in 2003 © Bloomberg
Traders on their phones in May 2016 © Bloomberg

The LME is unique among exchanges in allowing its users to hedge metals prices for specific days into the future, rather than in standard three-month increments as at most futures exchanges. Marc Bailey, chief executive of LME brokerage Sucden Financial, said the move to abolish the Ring could undermine the ability of its clients to do this kind of hedging in the future.

“We are disappointed that the exchange is consulting on this issue,” Mr Bailey said. “We believe losing the floor undermines the LME’s date system.”

But the LME said the closure due to Covid-19 had provided evidence that there was “no intrinsic link” between the date system and trading floor. Mr Chamberlain said the LME remained committed to maintaining its date structure, which was important for the physical metals market.

“The date structure is so fundamental to who we are,” he added. “I just don’t buy the argument that putting something on screen makes it less liquid, generally it makes it more liquid.”

The slow decline of floor trading

Brokers trade on potato futures on the floor of the New York Mercantile Exchange in May 1976 © Sahm Doherty/The LIFE Images Collection/Getty
1998

“The Battle of the Bund” led to Germany’s Eurex exchange seizing the market for futures on the country’s long-term debt from London rival Liffe. The contracts had been traded by “open outcry” in the UK, but traders preferred the electronic version because it could be more easily traded remotely, and shifted en masse.

2001

Intercontinental Exchange, then a small start-up, makes waves by buying London’s International Petroleum Exchange (IPE), where most volume was traded on the floor. Taking its cue from the Battle of the Bund, ICE built a modern electronic platform.

2005

ICE announced the closure of IPE’s pits, turning energy futures contracts such as Brent crude fully electronic. Weeks later IPE’s then-larger rival, the New York Mercantile Exchange (Nymex), unveils plans for an open-outcry pit in London.

2006

Nymex abandons its plan to reintroduce floor trading in oil contracts after little interest from traders.

2012

Intercontinental Exchange ends 142 years of history by shutting the soft commodity trading pits in New York as volumes dwindled, in favour of electronic trading.

2015

After 167 years, CME shuts most of its trading pits in Chicago and New York. Open-outcry trading had fallen to just 1 per cent of total futures volume. That decision included the Nymex open-outcry futures pits, which CME bought in an $8.9bn deal seven years earlier. Only pits connected to some options remained open.

2020

Coronavirus forced CME and CBOE Global Markets to shut their trading floors in Chicago, but they reopened over the summer. Among the precautions, traders had to submit to health checks and wear face shields in the pit.

2021

London Metal Exchange to consult about closing its open-outcry Ring after trading was temporarily halted by the pandemic.


Copyright The Financial Times Limited 2024. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article

Comments