© BloombergAn LME trader working the phones - Bloomberg
For more than century, it was filled with the sound of traders bellowing prices at each other. But since March last year, the historic open outcry Ring at the London Metal Exchange has been silent.
Dealers were sent away from the site's red leather benches for the first time since the Second World War as the pandemic took hold and electronic trading took over.
The end of lockdown now looms, but the Ring - where raucous shouting and hand signals are used to set prices across the globe, in one of the last markets anywhere to resist digitisation - may never return.
The LME has proposed making the shift to electronic trading permanent, arguing that the potential merits are clear from its enforced experiment.
It is among a host of other potential changes bosses are proposing to modernise and bring new business to the 144-year-old global trading centre for industrial metals. But a pushback is emerging among those who claim the LME risks shifting away from its core role in the physical metals market, exposing the tensions facing Matthew Chamberlain, the chief executive, as he seeks to secure its future.
"The LME has a great product and several competitive advantages including access to credit, the date structure, choice of execution venue, and low costs," says Fred Demler, global head of metals at ED&F Man, one of the Category 1 members which have exclusive rights to trade using open outcry in the Ring.
"They should make an effort to retain these advantages and enhance them, as opposed to disadvantaging end users and LME volumes."
Contracts covering about 3.5bn tons of metals such as aluminium, copper and nickel are traded each year through the exchange, which has its roots in 16th-century London and is now based in Finsbury Square.
© Provided by The TelegraphTraders react on the trading floor of the open outcry pit at the London Metal Exchange - Bloomberg
Global benchmark prices are set during hectic five-minute sessions in the Ring, while trading also goes on throughout the day via computers or the telephone. Owned since 2012 by Hong Kong Exchanges and Clearing, the LME has been tiptoeing away from its macho, old-school image - banning daytime drinking, for example.
Its latest efforts at modernisation are proving more controversial. As well as closing the Ring, proposed changes include new fee structures. Bosses also want profits and losses to be settled daily rather than only when contracts expire.
LME management argue that the overhaul could boost transparency, as well as making the market fairer and more efficient. But many traders fear that getting to grips with the new system will cause a headache and could drown them in red tape.
Deutscher Metallhandler (VDM), an influential German metals trade group, has written to Mr Chamberlain to claim that the proposals "do not serve the LME's strategic principles, especially that of serving the physical market." Closing the Ring will harm efficiency and liquidity, it argues.
There were 66 objections to closing prices between March 2020 and January 2021, compared to 23 during the 11 months before the closure, figures released last week show. The LME says more objections are to be expected due to the increase in participants in electronic trading. Others say there is a more fundamental problem.
"On the floor it's easy for the Ring dealers to use their own skill and liquidity to reshape a price back into line - when it happens on screen it's very difficult for them to do that," says Marc Bailey, chief executive of Sucden Financial, a Category 1 member. "The LME says the clients are not complaining - that's because we are still giving them the price, it's us that's suffering."
© Provided by The TelegraphA trader gestures from inside the Ring - Bloomberg
The change to cash settlement requirements - in technical terms, a move from contingent variation margin (CVM) to realised variation margin (RVM) - is also as a major area of dispute. RVM is used in most other commodities markets and favoured by many financial investors who want to take profits immediately. But is feared among physical metals traders given the impact on cash flows and because it will limit the capacity of LME members to offer key lines of credit.
Smaller companies who rely on these credit lines help "form the backbone of the LME and the depth of its markets," VDM warned, adding the move risked eroding the market's base without guaranteeing it will win any new business. Kevin Tuohy, co-head of base metals at StoneX Group, another Category 1 member, says its credit provision would be "small to non-existent," under RVM.
"The LME expects banks to pick up the slack - that is not the case; there has been a large withdrawal of banks from this space," he adds.
Mr Chamberlain says: "The proposal [to close the ring permanently]... is a proposal no chief executive of the LME ever wanted to make. The fact that I have felt the need to put this forward, I think people can read into that just how well we think electronic pricing has gone. With that evidence, we didn't feel we could sit on our hands."
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