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The London Metal Exchange reopened its iconic trading floor after an 18-month hiatus because of the pandemic, though questions about the long term viability of Europe’s largest open outcry pit remain.
Traders resumed their routine on Monday of setting daily official prices for metals from the floor’s distinctive red sofas in a lively period at lunchtime at the Finsbury Square facility.
But some traders and executives fear it will be only a temporary reprieve for the Ring, whose current incarnation dates back to 1877. The LME board had proposed permanently closing the floor after the exchange continued to function through digital interfaces during the pandemic, only to withdraw its plans after a backlash from some users.
The reopened trading floor will have a new structure that splits how crucial daily prices are determined. The move is designed to placate longstanding members who preferred using the open outcry pit, and its larger merchant trader and financial participants, who prefer to use an all-electronic system.
Many floor traders had feared the LME would lose one of its most distinctive features: the ability to hedge metals prices for specific days into the future, instead of using a standardised one- or three-month contract that are offered on most futures exchanges.
However, traders in the Ring will still be able to set “official” prices, which are largely used by the physical market as the reference price for the delivery of commodities contracts.
Setting the daily closing prices will remain electronic after the pandemic. The final price is used by banks, hedge funds and market makers to calculate the value of their portfolios.
The LME has discretion to temporarily move setting of the official prices to an electronic order book if Covid absences mean that there are fewer than five members available to trade on the Ring.
But some traders question if the trading floor is viable in the long-term.
“The reopening of the LME ring shouldn’t lull market participants into a false sense of going back to trading from a bygone era,” said Alexandre Bon, a market risk expert at market infrastructure provider Murex.
“From aluminium to copper, no asset class is more volatile than commodities right now. Managing this risk on screen is much easier than on a human trading floor where there is ample room for misinterpretation,” he added.
Only eight members remain in the Ring to set official prices. One longstanding member, Triland Metals, resigned over the summer to focus on electronic trading. The company, a subsidiary of Mitsubishi, had used the Ring since 1971. If the number of members drops below six or there is insufficient trading volume and liquidity, the LME admitted the trading floor may have to be closed.
To encourage trading in the Ring, the LME is offering trade rebates as an incentive scheme. The exchange has also given members of the Ring more flexibility by making some sessions voluntary. Even so, the new structure includes fallbacks that would allow the market to switch over to a fully electronic system if liquidity dries up.
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