LME Commits to Old Practice with New Open-Outcry Trading Pit

Voice-broking and the open outcry ring are in high demand from LME participants, proving that relationship transactions are still key.

The London Metal Exchange (LME)  has today announced its newly revamped open-outcry trading floor after moving its operations earlier this month to a new location. The new circular trading ring demonstrates a solid commitment to keeping an old-fashioned trading approach relevant and new, as exchanges become increasingly automated in terms of the need for human operators.

Finance Magnates spoke to people close to the news who explained how the demand for the open-outcry structure – which is how many financial markets originally evolved from deep within their trading pits – remains a core part of the LME’s value offering to members that have relationship-based trading such as face-to-face transactions and voice-broking.

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LME’s Chief Executive Garry Jones provided comments to Finance Magnates highlighting his view on the ring’s benefits: “The Ring provides the most transparent and credible global reference pricing for the metals industry worldwide, and supports the daily contract settlement structure preferred by physical market participants.”

Keeping the ring alive and vibrant

The ring structure has been relied upon by LME’s global metals business for 139 years, according to the company press release.

Mr. Jones added in the company’s release: “We’ve demonstrated our commitment to the Ring, a long-standing and trusted price-formation venue, by moving it with us to this exciting new location. Here, our investment in its technology and infrastructure will ensure its continued significance in today’s world.”

The LME, as any exchange structure, acts as a neutral intermediary and provides price-discovery to its members and floor traders to help level the playing field. Voice-broking in the UK is a significant business both at exchanges and off-exchange, and through inter-dealer brokers including foreign exchange trading between banks and institutions.

The LME conducted a survey in 2014 following its acquisition by Hong Kong Exchange (HKEX), and examined  both on and off-exchange trading, related to the open-outcry landscape. It concluded that the benefits provided by the pit-trading ring are still necessary when compared to autonomous trading pits (i.e. trading floors filled with computers rather than people).

Autonomous exchanges versus human interacted trading

Obviously, the exchange technology and market structure continues to need both people and computers – depending on a multitude of other needs, whether on the floor of the Chicago Mercantile Exchange (CME) where pit trading still exists (albeit to a lesser degree than 30 years ago),  or in places where it has become obsolete or nearly non-existent.  There are pros and cons of each side of the spectrum and neither is a panacea or silver bullet solution, at least not yet.

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Instead, the needs of the members and their end clients are what drives either choice. For LME the ring is still relevant, as demonstrated by their commitment to it with this announcement. Interestingly, the ring has been moved four times since its establishment in 1877 in Lombard Court in London, so its persistence alone demonstrates its survivability and fitness.

Visitors to the floor are wowed by the mysteries of open outcry and no less so when the market builds to a crescendo in a feverish race to complete clients’ instructions.

Moreover, something that algorithms can’t match is gauging the feeling of the market in terms of human intuition- which could perhaps be replicated in the future to varying degrees as artificial intelligence expands into “deep learning” fields by computers, and virtual reality.

In the meantime, and ahead of future technology convergences, in the press release a statement by LME member Sucden Financial Ltd’s CEO Michael Overlander highlighted some of the ring benefits.

“To hear, see and feel the pulse of the market through the conduit of the Ring provides the LME with an environment no other exchange can boast,” he said. Visitors to the floor are wowed by the mysteries of open outcry and no less so when the market builds to a crescendo in a feverish race to complete clients’ instructions. Our clients feel that our commentary from the Ring brings them as close as they can get to the vibrancy and life of the market.”

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