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21 January 2021

End of the Ring? Peace with honour?


This article was written by Martin Hayes. All views and opinions expressed are strictly his own.

Discussion papers have become the norm with the LME as a useful method of gauging the market’s thinking regarding potential changes, and whether to tailor after feedback or implement as proposed. Normally, such exercises take place without too much drama.

It is safe to say, however, that the paper that the LME sent out during a routine Tuesday on the future market structure was not a ‘run of the mill’ thumbsucker. Indeed, it may herald the most radical and widespread change in metals market trading seen for decades.

Of the various proposals, the headline-grabber is the closure of the 144-year old open-outcry trading floor - the last in Europe - which has been temporarily shuttered since March 2020, due to the pandemic. But, equally, ideas on enhancing electronic liquidity, margining changes, more transparency on inventories and warrants, and stricter limits for large positions are far-reaching.

If completely implemented, then the LME circa 2122, will bear no resemblance to the LME I first went to in 1975 and left just three years ago in 2017.

The permanent closure of the LME Ring, red leather seats, raucous shouting and yelling and ringing bells will be the greatest visible change, the most totemic, and, among many in the market-place, not necessarily all of a certain advanced age, the most controversial step.

Since the 1990s, LME CEOs David King, Simon Heale, Martin Abbott, Garry Jones and Matt Chamberlain have all maintained ring-based open-outcry floor trading in the face of screen-based electronic trading platforms for the whole of this century. Nobody, after all, really wanted the ring to close on their watch.

Open-outcry trading has been the hall-mark of LME trading since 1877, and has only been interrupted twice - briefly in 1914 for a few months at the outbreak of World War One, and then the more prolonged closure at the start of the Second World War in 1939, not re-opening until October 1952.

But the global coronavirus pandemic was the great unpredictable ‘once-in-a-century’ event that has forced the issue for the LME’s current hierarchy, which now has to consider what was once unthinkable.

In many ways, there is a parallel with the US’s agonies over the long-running war in South-East Asia. The recent excellent film - The Post - showcased the 1971 leaking of the Pentagon Papers, which shockingly revealed that a succession of US Presidents - Eisenhower, Kennedy and Johnson - had all widened the conflict in Vietnam, despite the growing knowledge that the war was unwinnable. The reason being that no-one wanted to be the first President to lose a war.

It was the mounting costs, both in money and human lives, bitter divisions in a divided nation, and military setbacks that saw President Richard Nixon seek an honourable way out - what he called ‘Peace With Honour’.

So it is for the LME and the floor.

In March, it will be the first anniversary of the closure, and, given the current nature of the pandemic in the UK and pace of the vaccination programme, there is virtually no chance that the ring will re-start much before the third quarter of the year.

In all the months of non-open outcry trading, the market, its customers, and the wider metals industry has become accustomed to and adapted to the electronic platform - indeed for many members below RDM Tier One, it is now preferable. 

And as the LME said, it expects this will benefit the market by broadening direct participation in pricing periods and increase transparency. The evidence for this is the 10 months of trading since the closure. 

Nothing stays the same forever. That is the nature of progress, and that is no bad thing in life in general or markets in particular.  Change can be gradual, or it can be evolutionary. Once in a lifetime, however, it will be revolutionary. 

So 2021, depending on the responses to the discussion paper and eventual outcome, may be the year that the metals floor closes for good, joining the Stock Exchange, financial futures, soft commodities, oil and shipping markets in the history books. 

Whereas the LME saw off the threat from tiny electronic impulses for over 20 years, the challenges thrown up by a miniscule virus were different. For sure, it would be possible to switch the lights back on and start the bells on the floor again at some time.

But that would be to ignore the evidence and practices of the last 10 months and go back to a world that does not really exist anymore.

For the LME, this is the time to look ahead – closing the floor is a ‘Peace With Honour’ moment, after all, and there is nothing to fear from that.

   


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