The world of metals trading has been transformed over the past 30 years. Long, lazy lunches and quiet afternoons have given way to 24-hour trading and aggressive market-making. But, Lord Copper asks, did the market change us, or did we change the market?
Back in the day, before my time (or, to be strictly accurate, before I was at a high enough level to enjoy it), life on the LME was a much more gentle existence. Getting in to the office early meant arriving by eight o’clock in the morning. Lunchtime involved leaving the boy to handle the kerb and heading off to, let’s say, the Savoy Grill, with a gaggle of one’s contemporaries to settle in for a civilised lunch with a couple of bottles of decent claret. No need to be back promptly for the lead and zinc ring (in those days, the metals not worthy of a ring each), and for copper only if there was something significant to do. Otherwise, drift back mid-afternoon just to check that nothing had gone disastrously wrong.
And the evening? Well, no point in being in the office after seven, at the latest. After all, what could possibly happen to the market once both the LME and Comex were closed? The only conceivable reasons for an overnight phone call would be something unexpected – earthquake, for example – in South America, or the highly unlikely event of somebody in Japan doing something outside the norm.
So generally, when you drifted in between eight and nine the next morning, things would likely be just as you had left them the evening before. It was a largely ordered life, with activity almost completely centred on the LME itself. Business had to come to the LME, rather than the other way around.
All that changed, fairly quickly, in the mid to late 1980s, driven by more-aggressive market-making (quite a lot of that energised from Hamburg, by the way), rapidly improving communication methods and a market becoming far more international, rather than focused essentially on Western Europe and the USA (with a little bit of Japanese involvement). That moved us towards the 24-hour market we have today. The leisurely hours those old boys enjoyed fell by the wayside, accompanied by the comfortable expectation that yesterday evening’s position and this morning’s position were, as a rule, going to be the same. Traders are now involved in the market at a much deeper level, and the LME is only one leg of an all-pervasive monster.
The interesting part about that little history lesson is the question of what came first: did the market change, becoming more volatile and more demanding, thus requiring participants to react to that change, or did the participants themselves generate the changes by their own change in approach (perhaps inspired by changing equity and bond markets)?
In other words, did the market develop in such a way as to demand different behaviour in traders, or did traders demand more from the market? Those aggressive traders in Hamburg, for example: did they create the demand for greater market-making because they offered it, or was it demanded by the market-users? In classic economics-speak, did demand create supply, or supply create demand?
I appreciate that this is probably no more than an academic point, not really of much importance, but there are two small things I find of interest. First, we are really pretty much reaching the end of the careers of those who were at their peak in the “old” style, so it is just about our last chance to make a comparison. Second – and more importantly, probably – if we can answer the question, perhaps it will give a guide to how to move future developments forward successfully.
My own view is that the change was probably supply-led: greater aggression from the sell side of the business, because that seemed the best way to improve returns, even if at a higher risk level, motivated more liquid and broader markets. And the improvement in communication and dissemination of information helped push that change forward. Of course, whether that’s a general rule or not, I can’t say; but the proliferation of high-frequency traders, particularly in equity markets, suggests to me that it is true that traders do things because they can – which only then leads clients’ demands. I don’t think it is really client-led; I think they’re pushed by what the sellers want to make available.