LMEWEEK-LME open-outcry trading alive and well despite JP Morgan exit

By Pratima Desai

LONDON, Oct (HKSE: 3366-OL.HK - news) 12 (Reuters) - Will the London Metal Exchange's open-outcry trading survive?

That perennial question has gathered impetus since the exit of JP Morgan last month, leaving just nine brokers to conduct often raucous "open-outcry" trading around a circular "ring" at the LME's headquarters in London's business district, observing traditions that date to the exchange's coffee house origins.

Many in the metals industry, which is gathering this week for LME Week, answer 'yes', that despite the loss of significant liquidity with the U.S (Other OTC: UBGXF - news) . bank's departure, critical mass will keep the system standing for some time yet.

"One less ring dealing member doesn't hit the 'crucial' button, even though historically JP Morgan have been amongst the more active liquidity providers," said Jeremy Goldwyn, a non-executive director at Sucden Financial.

Open outcry trading takes place in a circle of padded red-leather seats where traders use arcane hand signals during five-minute bursts of intense trading in copper, aluminium, zinc, lead, nickel and tin.

"If you lose another three or four brokers you lose critical mass, that would impact liquidity and make a mockery of the price discovery process," a senior commodity broker said. "But it's not going happen, not yet."

Settlement prices for benchmark three-month futures are determined in those five-minute bursts, or rings, of which a key feature is broken dates, the lifeblood of the floor, where any single date between cash and three months is tradeable.

Broken dates provide flexibility for producers and consumers reliant on transport schedules, which may not exactly match benchmark dates.

"The industry likes to trade at settlement, that's what their contracts are marked against," said Guy Wolf, head of market analytics at commodities broker Marex Spectron.

"The continued existence of the rings is primarily a function of the date structure (broken dates) of the LME. That structure has more chance of surviving now than perhaps five years ago because activity is again dominated by traditional players."

During the commodity boom of the last decade funds made a beeline for metals, seeing potential for lucrative returns. But many left when prices crashed during the crisis triggered by the collapse of Lehman Brothers in 2008.

Now (NYSE: DNOW - news) the LME is again trying to attract funds to boost volumes and fee income by promoting electronic trading of its standard monthly dates.

This, some fear, will take liquidity away from the floor.

But others say the exchange is targeting a different audience, one with systems based on monthly contracts common to other exchanges.

The ring has its roots in the early 19th century when the Royal Exchange, the world's first commodities market, became so crowded, metal merchants gathered at the Jerusalem coffee house on Cornhill in the City to conduct business.

The 138-year-old exchange is planning to move again, from its current Leadenhall Street headquarters to another location in London's financial district on Finsbury Square, where a new ring is being built.

"The exchange has invested a lot of money in the new site. Why would they want to jeopardise it's success?" the senior commodity broker said.

The LME declined to say how much the move is costing. (Reporting by Pratima Desai; Editing by Veronica Brown and Susan Thomas)