US Edition Change is coming at the London Metal Exchange (LME) says Garry Jones, the new chief executive of the world’s largest bourse for industrial metals who plans to grow business out of Asia, open a clearing house and develop more options trading to modernise the 136-year-old exchange.
The 55-year-old chief executive started in his new role with the LME this month after being appointed in the summer by Hong Kong Exchanges & Clearing (HKEx), which bought the bourse for £1.4bn last year. He is already planning to sharpen up the business, which could include finding larger office space in the square mile.
“We may have to move into a new building because of the growth of our business and staff, we’re bursting at the seams,” Jones told the Telegraph in his first comprehensive interview since taking over at the exchange. “It’s just obvious to me that we need more space.”
The first signs of a sharper corporate focus are already apparent at the LME where Jones is currently working out of a meeting room until work to build new executive suite is completed.
Established in 1877, the market plays a pivotal role in global trade by setting benchmark prices for several crucial industrial metals such as copper, aluminium and nickel. It is also central to the City of London’s status as a leading global financial hub. Aware of its wider importance, Jones cautions that any modernisation will involve “evolutionary not revolutionary” change.
“We’re not going to destroy a market that has been here for almost 137 years in five minutes that would be madness. I don’t think it needs it but there are ways we can modernise. The modernisation trend has already begun,” he said from the LME’s boardroom, which overlooks the trading ring where about $14 trillion (£9 trillion) worth of metal contracts change hands each year.
For the moment, the push to embrace smarter technology does not include the LME’s open outcry trading system, which he says is the most transparent method of buying and selling metal contracts on an industrial scale.
“We’re building a clearing house that will be ready in September next year and I would like to look at other ways to trade the market. It’s not about changing markets we already trade. We would like to be adding new things. I would like to do more in options on metals. Traditionally it hasn’t been a major focus, I think it should be. Options markets are very interesting, they offer a different kind of hedging vehicle, different kind of risk exposure,” he said.
An option is a type of security which gives the buyer the right to trade an underlying asset at a specific price on or before a certain date.
Maintaining the LME’s status with the world’s biggest metal trading houses and balancing the demands of its new commercial owners and regulators with the interests of various market participants will be a fine balancing act for Jones. A native of the Lake District, he has deep experience of managing international markets, most recently as chief executive of NYSE LIFFE, effectively the old London International Financial Futures and Options Exchange.
Jones would be the first to admit that his direct “belt and braces” knowledge of the metals industry from the copper mines in the mountains of Chile to China’s smelting yards is perhaps more limited than his predecessor Martin Abbott. However, he brings wider international business experience and perspective to the table.
“I’m really a markets expert not a metals expert ‘per se’ but I’m really hoping that the thought processes and methods of analysis that I have used in other businesses can be adapted to this. Frankly I feel the job needs experience of running a market, of running a business, rather than ‘do I know how a copper smelter works’,” he said.
His first days in the new job were mostly spent meeting and greeting 10,000 industry experts, investors and traders who converged on London for the annual LME Week shindig. Jones says that he attended five separate events and speaking engagements in one night and gobbled up three boxes of business cards networking during the event, which is held at venues across London in October. In an effort to grow business in emerging markets, the company is also launching an LME Week Asian in Hong Kong
“You have to be very careful what jokes you tell to such a multi-national audience, try not to upset anybody,” he said in reference to the diversity of the event in London.
LME Week also provided Jones with a valuable opportunity to gauge the mood of the general metals market. Many analysts view metals as one of the leading indicators for world economies and trade flows particularly out of Asia and China in general.
“I really think we’re at the cusp of an economic turnaround. More trade flow, users meeting producers to set contracts for next year, economists are giving a more positive picture,” he said. “Look around London and look at the amount of building going on right now and look at the number of traffic jams as a result of building, it’s phenomenal.”
Prior to the Hong Kong takeover, which was criticised by some due to concerns over the market’s pricing and trading mechanism coming under the influence of China, LME was run as a mutual concern whose membership based stakeholders included a hotchpotch of brokers and large trading houses like Goldman Sachs and JP Morgan.
“When the company was a member-owned mutual it was governed in a different way. It’s now run as a separate business, part of a very large commercial business and we have to listen to the full value chain of stake holders,” said Jones.
His ability to listen to market participants has immediately been tested by a storm of criticism and legal action over queues to withdraw aluminium from some of the 700 licensed warehouses in its global network and calls for greater transparency about disclosing futures positions.
Jones explains that despite the complaints there are queues to withdraw metal at just five of the warehouses where aluminium is stored and that only a small number of participants are affected by the problem. Just 1pc of all futures traded on the exchange result in the exchange of warrants, meaning the vast majority of trades are closed out before going to delivery.
“Whatever we change, if we change the rules it is one of five factors that determine that queue and if you talk to a producer he will say don’t change the queue we’re happy with the arrangement. If you talk to an end user he is saying the opposite. In broad terms everyone is out for profit maximisation in their area so you will have a situation where a producer and end user will have diametrically opposed views. We need to be the consensus in the middle. We’re looking at several ways to improve the efficiency of that,” said Jones.
LME also finds itself under assault from competition in the US. CME Group, the world’s largest futures exchange, is eyeing the launch of an aluminium contract on the LME’s home turf. Jones dismisses any serious concern over the new entrant stepping on the LME’s toes but confesses that in terms of regulation there is often an uneven playing field between the UK and North America.
“It’s quite hard in Europe to do business in America but not quite so difficult for Americans to business in Europe,” he said.