LONDON, Aug 28 (Reuters) – The future of ring trading on the London Metal Exchange appears secure for now after almost all firms involved told Reuters they would continue to stick with open trading on one of the last trading venues that still supports it.

The ring’s origins date back to the early 19th century, when the Royal Exchange, the world’s first commodities market, became so crowded that metal traders met at the Jerusalem Coffee House on Cornhill in the City to do business.

In the 1980s, about 30 firms traded in the LME ring, a circle of padded red leather seats for traders who use mysterious hand signals during five-minute periods of intense trading in copper, aluminum and other metals.

Now there are only seven participants left and the LME has announced that the exchange will close if the number of ring members falls below six or if their trading in the second ring falls to less than 75 percent of the previous year’s level.

Several sources said the high costs of ring dealer companies and a global trend toward electronic trading threatened to undermine the minimum number of participants needed to keep this centuries-old method of trading afloat.

The loss of the ring, which includes four trading sessions a day, would be a major blow to mining companies and industrial firms that value floor trading.

They believe that there is no speculative influence in open trading, where official prices for physical transactions are determined based on a complex structure of multiple future dates.

For years, there have been tensions between traditional users of physical currencies and the financial world, which includes hedge funds, speculators, commodity trade advisor mutual funds and funds controlled by algorithmic programs.

Many long-time users also see the danger that an excess of computer-controlled speculative flows could distort the prices that are crucial for trading in physical metals.

“It’s that second ring closure, the official price, with no algorithms, no CTAs, no specs, that still has its appeal,” said Marc Bailey, CEO of ring trader Sucden Financial.

QUESTIONS ABOUT FEASIBILITY

An outcry from physical LME users saved the ring three years ago, when the 147-year-old LME proposed closing the trading floor and joining the majority of other financial exchanges that have moved to purely electronic trading.

The exchange argued that a temporary switch to fully digital trading during COVID-19 proved that the ring was not strictly necessary.

But the LME ultimately compromised and now operates on a hybrid basis: it uses public trading for official prices that serve as a benchmark for physical users’ transactions, and an electronic system for closing prices.

According to a Reuters poll, the majority of existing ring members are currently still committed to the ring, supported by miners and companies that use physical metal.

“There are enough people who still want an independent price for physical trading,” said Sucden’s Bailey.

Sources with direct knowledge said Amalgamated Metal Trading, CCBI Global Markets and GF Financial also planned to continue trading on the LME floor, while Sigma Broking declined to comment.

Ring members must bear the additional costs of having traders present both in the office and on the LME floor, which one industry source estimates can amount to $1 million a year.

“Maintenance is expensive, but we still make money from the ring,” said a senior executive at a ring dealer who wished to remain anonymous.

SMALL PLAYER

SocGen was a relatively small player in the ring, and one LME executive estimated that the firm accounted for just 6 percent of open outcry trading. A manager at an LME ring trader said it expected its ring business to be reallocated to one or more of the remaining brokers.

Some LME members argue that electronic trading has worked during COVID-19 and a complete switchover is inevitable.

“The writing is on the wall,” said one industry source. “The ring is actually irrelevant because these prices were recorded electronically during COVID and no one noticed a difference.”

But the ring still has support. A manager of a European company that buys LME metals for its products said the exchange should create a more profitable ring by proposing a more cost-effective solution.

“Without the ring, the LME is just another commodity exchange,” he said.

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