The last outpost in the City of “open outcry” trading, where dealers shout orders at each other face-to-face, could be set to close as the London Metal Exchange today issued a consultation on plans to shut its famous trading floor, “the Ring”.
Traders have held out for years against those claiming open outcry’s old-fashioned ways were less efficient than going electronic, but Covid-19 has weakened the arguments of its proponents.
Since March, the 144-year-old exchange has closed the Ring and moved trading electronic due to social distancing restrictions.
It was the first time since the Second World War that the raucous Ring had been shut, and its wheeler-dealing traders and clerks, with their obscure hand signals, silenced.
If it closes, it would be a major blow to lovers of City history, perhaps even on a par with the closure of open outcry at the far bigger London International Financial Futures and Options Exchange in 2000, where 26 trading pits once flourished.
Some Liffe traders moved into telephone or electronic broking, while many more left the City altogether to pursue other, often less lucrative jobs.
Many LME traders have been furloughed since the Ring shut and will have been fearing today’s announcement.
In his statement on the consultation, LME chief executive Matthew Chamberlain said: “The LME believes it is the right time to consider the permanent closure of the Ring and a move to an electronic pricing structure.”
"The Ring is a greatly treasured aspect of the LME’s rich 144-year history, and its closure is not a decision we or our market will take lightly.
“However, the LME has stood the test of time precisely because of its ability to adapt to the evolution of market dynamics and trading behaviour.”
He said he did not want to use Covid as a pretext to shut the Ring but said “it is fair to observe that this period of electronic pricing has served the market well.”
He added that volumes of trading had been high and pricing transparent to buyers, with more participants being able to access the market.
Fans of open outcry say there is no substitute for face to face trading with experienced people negotiating the prices, particularly on complicated contracts.
While only 10% of LME trading is done through the Ring, the prices agreed there are used for all the other trades.
The LME uniquely offers trades that are priced on dates from two days’ time to 10 years’ time.
That complex date structure has become the norm for the entire global metal trading industry and is the reason the LME has been the last of the great London exchanges to hold out on open outcry.
Chamberlain admitted that on the more complex of those products, even after nine months of being closed for Covid, the LME still did not have the data to prove electronic pricing was definitely as effective.
However, he stressed he was proposing that the more complex risks could go onto telephone broking, where the traders negotiate one-to-one. Fees will be going up for such trades, though, in an effort to move traders more onto the digital screens.
He said: “All of us involved in this decision are aware that history is heavy on our shoulders. Trading has been done like this for 144 years. It is a tough thing to do. So you can read into that how strongly we feel the evidence says this is the right thing to if we want to be here for another 144 years.”
He admitted that, while the closure process was part of a review, “we at the exchange have definitely come to the conclusion that it is the right thing to do, but we have to wait and see what the feedback is.”
Simon van den Born, president at Marex Spectron, which has a big share of the LME market, was relaxed about the move.
He said traders’ view on the closure would split down the lines of those, like Marex, which have invested heavily in digital trading already, and those who have not.
“A lot of people thought the Ring was always going to continue but for many of us it was always a possibility it wouldn’t, so we knew we’d need to invest in more digital applications and products. Others didn’t do that.
"For us, the only surprise has been the suddenness [brought about by Covid].”
Some of those who did not diversify away from the Ring have complained of a 75% collapse in trading volumes and have had to furlough staff.
The bigger firms who could more easily adapt to the digital way of working had been making more money since Covid by taking share from those who didn’t, one trader said.
Traders and customers have until the end of March to respond, with the LME aiming to provide feedback before the end of June.
Given the slow process of getting back to office life in the Covid pandemic, that means there is a high probability that the Ring will never trade again.
Chairman Gay Huey Evans said the LME was “committed to fully discussing these topics with all stakeholders before making any proposals” but many traders appear resigned to closure.
LME is owned by Hong Kong Exchange and Clearing, and in October it laid out proposals to extend the closure of the Ring, which in normal times would underpin some $50 billion of trades each day.
The Ring has moved four times since being founded above a hat shop in Lombard Court in 1877.
It arrived at its current home in Finsbury Square in 2016 but had to move out temporarily when the building it was in suffered structural problems that sounded like gunshots as steel pins in the upper floors cracked. Traders relocated temporarily to Chelmsford.
Traders have had a tricky relationship with the exchange since it was sold to the Hong Kong market for $2.2 billion in 2014. It had been owned mutually by the trader-members, but they quickly found fees to use the exchange started going up.
Today’s announcement will do little to repair relations.
Why is it called the Ring?
The LME trading floor is a 20 foot diameter circle with a long red leather seat going around the perimeter.
This echoes the traders’ Victorian forebearers, who traced out a circle in sawdust at the Jersualem Coffee House off Cornhill.
Traders are banned from standing in the ring so as to avoid blocking off sightlines of the traders and clerks. Traders in the ring must always keep one heel of their foot touching the seat, even as they scream and shout their orders at their peers.
In one infamous occasion in 2014, seven traders were fined for standing, with one suspended for a day.