By Eric Onstad
LONDON (Reuters) – Two commodities brokers say data the London Metal Exchange is using to support its proposal to shut its trading floor for good exaggerates the increase in the use of electronic platforms during coronavirus lockdowns.
Sucden Financial and StoneX Financial, which oppose the end of so-called ring trading at the 144-year-old exchange, say data used by the LME in a presentation https://www.lme.com/-/media/Files/News/LME-strategic-pathway/2021/LME-Discussion-Paper-on-Market-Structure-2021.pdf?la=en-GB does not take into account electronic trading before floor trading was suspended in March.
The row highlights a long-running battle between modernists and traditionalists over the future of the LME ring, the last open-outcry trading floor left in Europe after other exchanges for everything from oil to stocks to cocoa all moved online.
The LME data shows the average daily volume of copper traded in the closing price window – which is used to value end-of-day positions – jumped 169% and meant more people participated in price discovery when only digital platforms were available.
However, the data compiled by Sucden and StoneX, which has not previously been published, shows the volume of copper traded electronically in the closing window fell 13%.
They say the discrepancy is explained by the fact their data compares electronic trading under lockdown with ring trading and digital platforms beforehand, while the LME comparison does not include electronic trading before the pandemic struck.
The LME, owned by Hong Kong Exchanges and Clearing Ltd, said the data provided by the brokers was accurate.
“In the paper, we were really clear that we were doing a very specific analysis, looking at the volume directly contributing to the pricing window,” Jamie Turner, the LME’s head of market structure, told a webinar on Thursday.
(Graphic: London Metal Exchange says electronic trading has been a success: https://fingfx.thomsonreuters.com/gfx/mkt/rlgpdeadmvo/LME%20presentation%20Electronic%20pricing%20has%20worked.png)
OUT WITH THE OLD?
The LME temporarily suspended its ring – a circle of padded, red-leather benches where traders signal buy and sell orders with hand signals and shouting – on March 23 last year and now wants to make the closure permanent.
The world’s oldest and biggest marketplace for industrial metals launched a consultation process last month and argued the forced migration to digital trading was a success.
Michael Overlander, chairman of Sucden Financial, said the LME had provided only a partial picture of closing market activity and their rival data was more representative.
“This data clearly contradicts the LME’s claim that volumes used for reference prices have been significantly higher since the ring closed,” Overlander said.
(Graphic: London Metal Exchange volumes before and after the closure of the open outcry ring: https://fingfx.thomsonreuters.com/gfx/mkt/yzdvxwjgxpx/LME%20volumes%20before%20and%20after%20ring%20closure.png)
Copper was not the only metal to show discrepancies. For aluminium, the LME data shows trading jumped 130% while the broker data has a 17% increase. Zinc volumes surged 176% under the LME data but rose just 15% according to the brokers.
Their data shows electronic trading volumes for nickel and tin both fell along with copper in contrast to the LME numbers.
“We very much welcome all views in respect of the proposals put forward in our discussion paper on market structure and would encourage market participants to send us their feedback,” the LME said when asked for comment about the discrepancies.
The LME compared volumes in the ring during the 127 trading days before it closed, from September 2019 to March 2020, with turnover on its LMEselect digital platform for a similar 127-day period from June to December.
The exchange used data from June to December as it was the most recent period, it wanted the two periods to be the same length, and it also believed it would be more representative because trading was still in transition during April and May.
OVER THE PHONE
Overlander said the LME’s proposals did not acknowledge that transferring all trade to its electronic system, which currently handles less than a third of total volume, was a massive job.
Sucden said the bulk of the trading volume takes place in deals between members themselves and members with their clients, often over the telephone, before being cleared through the LME.
Data from the LME’s web pages https://www.lme.com/en-GB/Market-Data/Reports-and-data/Volumes/Monthly-volumes showed that over the past 15 months, an average of 30% of volume has gone through the LME’s electronic system.
The LME is unique among exchanges in that it allows users to lock in prices for individual days for up to three months into the future and weekly prices for up to six months ahead.
That means there are hundreds of potential dates to trade and adjust, with much of that activity done over the telephone.
Major ring-dealing broker Marex Spectron, however, was less concerned about a potential ring closure, saying it anticipated such an outcome.
“We … have been developing our electronic presence with sophisticated algorithmic strategies on LMEselect and our own proprietary liquidity platform,” it said in a statement. “We are in a good position to take advantage of this development.”
(Graphic: London Metal Exchange Electronic Volumes Less than a Third of Total: https://fingfx.thomsonreuters.com/gfx/mkt/jbyvrdbndve/LME%20Electronic%20volumes%20less%20than%20a%20third%20of%20total.png)
(Additional reporting by Pratima Desai; Editing by Veronica Brown and David Clarke)
