Société Générale to leave LME floor but the ring goes on | Hotter Commodities

The change, which will take effect on August 27, will bring the number of ring dealing Category I members of the exchange to seven, and increase the number of Category II members to 29.

It’s a disappointing blow to the ring, but Société Générale’s departure won’t trigger its closure.

The criteria for the ring’s closure are if the number of Category I members falls to five, or if second-ring volumes decline by 25%.

There will still be more than five members left, and market participants estimate that no Category I member accounts for more than 25% of ring volumes.

Société Générale’s planned departure from the floor comes as LME volumes are staging a stellar recovery following a lull after the exchange’s decision to suspend and then cancel nickel trades in March 2022.

According to the most recent data from the LME, trading volumes rose by 29% year on year in January to June, with nickel registering the highest percentage increase of 73%. Total average daily volumes rose by a further 29.6% year on year in July, the data showed.

The seeds of the ring’s closure criteria date back to March 2020, when the LME closed the ring due to Covid-19.

In January 2021, it proposed in a discussion paper the permanent closure of its open-outcry trading floor, and incentives for greater liquidity on its electronic trading platform.

But there were more than 190 responses to the discussion paper, and these caused the exchange to rethink its plans. The exchange announced a compromise in August 2021: it would continue with plans to split its pricing structure, with closing prices to be determined electronically on a permanent basis.

Since then, the exchange has already lost two ring dealers and gained one.

First was Triland Metals, which resigned as a Category I member of the LME in August 2021, ending almost 50 years as a ring-dealing member of the exchange.

Then in January 2022, Sigma Broking joined the LME as a Category I member, boosting ring dealing numbers to nine.

But in July 2022, ED&F Man Capital Markets moved off the ring trading floor, an inevitability after being acquired by fellow Category I member Marex.

The remaining Category I members of the LME are Amalgamated Metal Trading, CCBI Global Markets (UK), GF Financial Markets (UK), Marex Financial, Sigma Broking, StoneX Financial and Sucden Financial.

There’s no indication that any of these participants are looking to exit the floor; that said, there is never any public indication that a ring dealer is considering a membership category change. And, just as Sigma was a surprise addition to the ring members in 2022, maybe there’s another potential new Category I member lurking in the background.

The demise of the 147-year old open outcry trading floor has been predicted for decades, and still it has survived, adapting to the changes thrust upon it. No single member will want to be the ring dealer that triggers the closure of the floor, and those that remain clearly believe it provides the best method of price discovery for their clients.

Commentary by those same clients during the discussions over the fate of the floor in 2021 demonstrated that they too prefer to use the ring.

The former acting managing director for Minmetals (UK) memorably summed up that view when he said that the ring provides a necessary dialogue with brokers acting on their behalf that a screen cannot provide, along with increased liquidity and reduced volatility.

“We believe the coexistence of ring dealing and electronic platform can meet the demand from diversified participants. The world is changing every day, and industrial entities need excellent brokerage services to help connect them to the market,” Liangmin Gu said during a Fastmarkets copper seminar.

“The brokerage houses need a direct dialogue to follow up the pricing of the industrial entities,” he added. “Ring dealing can offer such a direct dialogue; digitalized screens cannot do the same.”

In Hotter Commodities, special correspondent Andrea Hotter covers some of the biggest stories impacting the natural resources sector. Sign up today to receive Andrea’s content as it is published.