Clash of the Titans: Venues Vying for Control of London Gold Market

The London gold market is undergoing a shift, with several exchange groups entering the market.

The London gold market is currently home to nearly $5 trillion, with several leading venues all making bids to assert themselves as leaders of one of the most actively traded hubs in the world, according to a recent Bloomberg report.

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The market itself has seen a transformation in recent years as it shifts to a more digital structure. This in turn has been met with a shifting regulatory atmosphere, as the London Bullion Market Association has overseen the shift of over-the-counter (OTC) trades, which serve as the market’s paramount pricing benchmark.

Shifting Field

There are a variety of new ways that are being introduced for buying and selling precious metals, which are being offered by industry mainstays such as CME Group Inc., Intercontinental Exchange Inc. (ICE) and the London Metal Exchange (LME).

In tandem with this movement, multiple leading banks are also part of this process, including Goldman Sachs Group Inc., HSBC Holdings Plc., JPMorgan Chase and Co., among others.

The London gold market presently accounts for half the world’s gold trading, making it the largest of its kind in the world. The present structure of OTC transactions has also created a level of risk with buyers and sellers, as opposed to relying on clearinghouses.

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However, since the global financial crisis nearly seven years ago, all markets, including London, have been embarking on a strategic shift to evaluate how they do business and correctly manage risk – simultaneously, regulators have been also answering the call with greater measures. Contributing to this trend has been the bringing to light of multiple scandals, including the manipulation of LIBOR and FX rates.

One Group to Rule Them All?

The LME, ICE, and CME Group each are seeking bigger roles in the London gold market. The LME currently boasts the world’s largest base-metals exchange and has announced plans to make inroads into precious metals trading in H1 2017 – this will also pave the way for platinum and palladium offerings.

The LME remains one of the most interesting cases given that it is backed by a group of five leading banks including such names as Goldman Sachs, ICBC Standard Bank Plc and Societe Generale SA, among others.

ICE already owns numerous commodity and financial exchanges and runs the daily London gold auction on behalf of the LBMA among 13 authorized participants. Earlier this year, ICE embarked on a plan to own gold contracts that involve bullion held in London, traded on its New York exchange. Last month, CME announced its intent to initiate an offering in London in January.

Finally the Chicago Board of Trade has also plotted a course into the London marketplace.

For now, it remains uncertain which party will emerge victorious or come out on top, as the leading venue will command one of the largest markets on the planet. According to Raj Kumar, Head of Precious Metals Business Development at ICBC Standard Bank: “There will always be an OTC market in London, but much of what currently takes place here will shift to the exchanges. Participating in any new contract incurs set-up costs, and so firms will need to prioritize which venues they are likely to trade.”

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