London Calling - Out Loud

It's the world's largest trading floor trading in metals-related contracts. Those who've witnessed it first hand (the public observation gallery is open to all) come away, variously aghast, confused, or in fits of laughter - provoked by a system which seems almost impenetrable.

The LME itself admits that its operations "may seem archaic". Perhaps they're peculiarly British (as visitors to the romps abounding in the mother of all parliaments might agree.) But one thing is certain: the daily trades on the LME fix metal prices which indirectly affect the livelihoods of millions of people around the globe.

The following article may add a little to our understanding of how a quaint edifice, established in 1877, continues to underpin an essential part of global trade.

LME offers first-hand experience of a vibrant, robust market

The 131-year-old London Metal Exchange hosts one of the last open outcry trading systems in the world, as most other exchanges succumbed to electronic trading years ago.

Pratima Desai

Reuters

20th October 2008

LONDON - Open outcry trading on the London Metal Exchange may seem archaic in a world dominated by computers and the Internet, but it fulfills a vital function and continues to thrive.

It offers something almost unique: the ability to customise individual trades for consumers and producers more easily than any electronic system could.

Contracts such as the benchmark copper and aluminium for three-month delivery work for investors, who typically don't deliver or take delivery of physical metal and instead roll their positions from one month to the next.

But most consumers and producers need more flexibility in terms of dates, also known as "carry trade" -- the simultaneous purchase and sale of the same tonnage of metal for delivery on different dates.

Metal can be bought and sold a few days, weeks, months or years ahead.

"On the floor you can do any dates and you have good sources of liquidity in front of you, next to you and all around you," said Mike Frawley, global head of metals at Newedge Group.

"If you go to the floor of the London Metal Exchange, you experience first hand a very vibrant, a very robust market."

The exchange's electronic trading system Select dominates three-month contract trading.

"Carry trades can be executed on Select, but there isn't that much interest," said Michael Khosrowpour a trader at Triland Metals. "The possibilities are endless and it is easier for people to execute carry trades in the rings (floor)."

NOSTALGIA

The 131-year old exchange hosts one of the last open outcry trading systems in the world. Most others, including the London Stock Exchange, succumbed to electronic trading many years ago.

It has 12 Category 1 member firms, which are allowed to trade in the rings.

"The floor adds considerable value for the metals community," Frawley said.

In September, about 10 million futures contracts were traded. Around half of that total -- more than 100 million tonnes worth nearly $300 billion -- was in aluminium.

The breakdown between Select, rings and telephone is currently 38 percent, 27 percent and 35 percent respectively.

"The floor remains a vital part of the exchange's price discovery mechanism," said Emma Davey, a business manager at the London Metal Exchange.

"There are ... many thousands of combinations of carry trades on our contracts. That type of trading activity suits the open outcry form of trading."

The exchange believes the role of the floor to be so important that it has this year built a full sized trading floor at a "disaster recovery" location outside London.

Ring trading for now is crucial, but it could ultimately come to an end.

"In the long term probably most commodity markets will go electronic, it's only a question of sophistication of systems," said Ian Morley, director at fund manager Quantum.

"Then it'll be nostalgia holding the market back from going electronic."

(Reporting by Pratima Desai; editing by Christopher Johnson)