By Joe Wallace 

LONDON--The London Metal Exchange is proposing to close its open-outcry ring, where traders have swapped metals like copper and lead using an array of cries and hand signals for 144 years, in a bid to attract more financial players to its marketplace.

The LME temporarily closed the ring when Covid-19 ripped through the U.K. in March last year, judging the tight circle of red couches that dozens of traders crowd around to be a health risk. In a discussion paper on market structure published Tuesday, the exchange, owned by Hong Kong Exchanges & Clearing Ltd., proposed to shut it for good.

The ring began life when the LME was founded above a London hat shop in 1877, though its origins date back to sawdust circles around which merchants bought and sold metals in the early 1800s, when metals were in high demand as the industrial revolution gathered steam. It survived two world wars, the decline of the U.K. as the world's leading industrial economy and the rise of China as the largest metals consumer.

But the coronavirus pandemic may prove to be a test too far. The LME said Tuesday that electronic pricing had served the market well during the pandemic and brought greater transparency around the way that prices are set. It also said the closure would attract a broader group of participants to the market, beyond the physical-metal players that tend to favor the ring over the LME's electronic platform.

If the change goes through, the LME would join CME Group's New York Mercantile Exchange, which closed its open-outcry trading floor in lower Manhattan in 2016. The LME said it plans to lay out its next steps by the end of the second quarter, following feedback from market participants.

Since being bought by HKEX in 2012, the LME has worked to attract more hedge funds and other financial players. Some have been put off by the unique nature of LME contracts, which cater for the delivery of metals daily out to three months, rather than monthly, as on the CME.

The ring has at times proved to be a point of controversy as the metals industry tried to clean up its image. In 2019, the LME banned drinking on the job amid mounting criticism of an alcohol-fueled, male-dominated working environment.

"The ring is a greatly treasured aspect of the LME's rich 144-year history, and its closure is not a decision we or our market will take lightly," LME Chief Executive Matthew Chamberlain said in a statement. "However, the LME has stood the test of time precisely because of its ability to adapt to the evolution of market dynamics and trading behavior," he said.

Though much trading had already migrated to the LME's electronic platform before the pandemic, many market participants still routed orders through ring members. Some thought that open-outcry remained the best way to set closing prices that are used as reference points in metal contracts globally, while electronic trading was suitable for investors betting on the direction of copper prices.

But brokers and traders say the shift to electronic trading during Covid-19 has gone smoothly.

"It's more transparent, more reflective [of supply and demand]," said Malcolm Freeman, chief executive of Kingdom Futures Ltd., who started his career as a clerk at the LME in 1974. "What you would lose with the ring going is a sort of community spirit."

Geoffrey Sambrook, who traded on the LME for three decades and now publishes analysis of the metals market under the pseudonym Lord Copper, said the proposal was inevitable and would likely be welcomed by many market participants.

"The world has got used to operating on a different basis now," Mr. Sambrook said, referring to the move to online working during the pandemic.


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(END) Dow Jones Newswires

January 19, 2021 09:14 ET (14:14 GMT)

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