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Some of the best British drama takes place daily at the London Metal Exchange by Finsbury Square. Eight traders in dark suits and ties sit twitchily on a ring of red sofas, facing each other. They mutter prices and make hand signals, then leap to their feet and lunge forward in the final seconds before a buzzer sounds to finish each five-minute session.
“Sell, sell, sell,” one trader called out at 12.35pm last Tuesday, gesturing in turn to three others at the end of day’s second copper trading session in the LME ring. The deals set a global benchmark copper price of more than $10,000 per tonne, and ring trading in aluminium, nickel, zinc and other industrial metals followed.
The LME ring is the last remaining European open outcry trading venue, as other futures exchanges have moved wholly to electronic platforms. It has been at risk for some years and looked in danger last year when Société Générale withdrew. The French bank’s place was later taken and an eight-member ring endured.
But while the ring is entertaining to observe, its fate is a sideshow to the future of the LME itself. The exchange must compete to maintain its lead over the US metal derivatives exchange Comex and the Shanghai Futures Exchange. It also has to contend with the growth of off-exchange dealing between investment banks and funds.
The LME is in a better place now than during the “nickel crisis” three years ago, when it shut down trading in the metal for several days and reversed contracts as the price spiked. The exchange won a legal case brought by funds that lost profits, but it was fined £9.2mn this year by its regulator, the Financial Conduct Authority, for not having had adequate controls.
The exchange got lucky this year from President Donald Trump’s erratic imposition of tariffs on US copper imports. That led to a large price gap emerging between prices on Comex and the LME, with commodity traders rushing to bring copper into the US to beat a tariff deadline. Trading volumes fell on Comex and rose on the LME amid the political chaos.
The LME has enjoyed deep ties to the physical business of commodities since it was founded in 1877. Its daily prices are often written into global contracts between miners and metal refiners. But the exchange worries about future growth and whether Comex is better adapted to modern financial markets.
Banks, traders and exchange traded funds tend to trade in liquid, monthly contracts of the kind in which Comex specialises. Some will take a view on likely demand and supply based on the health of the global economy — a trade known as Dr Copper — while others trade technically.
The LME is trying to strengthen its own monthly contracts on the third Wednesday of each month, alongside the rolling daily prices. The exchange wants most trading in these contracts to be handled electronically, as on Comex. Having retreated amid fierce opposition from one proposed rule change to encourage this, it is pressing ahead with others next year.
The dispute is rooted in the LME’s unusual structure. The ring accounts for less than 1 per cent of trading volume, despite its prominence. The rest is divided between its electronic platform and deals that banks and brokers strike directly with clients, often on telephones. This is profitable for them but makes the exchange less transparent and puts off some investors.
Tensions are not helped by the LME having planned to abolish the ring four years ago, before conceding. It was acquired for £1.4bn by Hong Kong Exchanges and Clearing in 2012, but its member banks and traders still wield power. Matthew Chamberlain, chief executive, says the LME has always changed and “now we are looking to evolve more quickly”.
The LME has to tread carefully: big banks are members but they also trade over-the-counter futures. They made it weaken a proposal to bring some of these deals to the exchange. Smaller brokers argue that the OTC market is the true threat to the LME’s future. “The ring is not the issue, it is global investment banks trading privately with their clients,” says one ring member.
It is hard for the exchange to manoeuvre through these conflicting interests to stay competitive. But it has been around for a long time and has managed to survive. Poised between the financial and physical worlds of metals and mining, it has a unique personality. If it keeps up, it can prosper.
john.gapper@ft.com