There Will Be Changes in the London Metal Exchange

Submitted by Emma Cox as part of our contributors program

There Will Be Changes in the London Metal Exchange

The London Metal Exchange, the largest global financial market for base metals trading, is the only remaining trading pit in Europe that uses the open-outcry method. This is considered a bit outdated by experts today, as most trading centers for other commodities and markets have already gone digital and electronic.

Open-outcry refers to the means of communication use in stock, commodity, or future exchanges wherein bidders bid through verbal manner and hand signals to convey information inside trading pits. Most exchanges now use modern trading systems, as it is cheaper, faster, and more effectual in terms of trade execution.

By next year, the 138-year-old London Metal Exchange will move from its old address on Leadenhall Street in London City to a new office a mile north in Finsbury Square. But its new chief executive Garry Jones is adamant that it would keep the ring that speaks of its rich history and beautiful tradition.

The Ring is the LME’s open-outcry trading floor and, over the years, several traders were fined for disobeying its stringent rules. One of these rules that many consider as “overly strict” is “a trader must keep at least one foot in contact with their seats while trading.”

Many questioned the idea of bringing the old ring to the new location, but Jones reinstated that the decision will not affect the supposed modernization plan of the LME.  For him, it’s all about retaining the aestheticism that defined the industrial metals exchange. Introducing the newest technology in the exchange segment and building a clearing house will remain a priority, as these are essential in meeting strict European regulations.

“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 told Telegraph in 2013.

In 2012, Hong Kong Exchanges Clearing (HKEx) acquired the LME by £1.4 billion, and one of the first changes it wanted to impose on the ageing market is modernization.  The acquisition now allows the LME to enter the Chinese market, giving them the chance to finally dominate Beijing’s gigantic base metal industry. In 2009, the Chinese government banned the LME from  entering the country, a move that many economists considered highly political.

By this time, the size of its operations has been fast-growing, with its employees increasing twofold. In fact, one of the initial amendments in the old policy was the acquisition of a bigger office to accommodate the expansion.

But apart from expansion, Jones has to deal with the various problems that its past leadership left.

LME is also mulling over the reinstatement of providing forward curves to banks as a reference points for clients’ forward positions at the end of a specific trading day. Increased regulatory inspections from bigger banks like Barclays, UBS and JPMorgan forced the LME to stop providing forward curves in 2014.

In March, LME head of Business Development Matt Chamberlain told Reuters that it is now considering producing forward curves based on executable forward bids and offers, as well as on transactions of daily trades, which is presented by the participating banks anonymously.

“The next thing for us is looking back at the forward curve, and we’ve been having a lot of conversations along those lines. When you talk to market participants about that, you often get involved in a broader discussion about what the right structure for the business is and how the forward curve would fit into that,” Chamberlain said.

The London Metals Exchange is where mining companies focused on base metal commodities trade. Among which are giant industrial metal miners like BHP Billiton (BHP), Vale SA (VALE), and Norilsk Nickel (NILSY.PK), as well as smaller players like Hecla Mining (HL), FinnAust Mining PLC. (FAM.L), and Amur Minerals Corporation (London AIM: AMC). Amur Minerals Corporation is a junior mineral explorer and producer that runs and operates the Kun-Manie project in the Russian Far East.