LME to close London ring trading, primes full electronic trading for next week

The London Metal Exchange intends to suspend all ring trading and move to full electronic pricing from next week if the United Kingdom's current directives restricting the movement of people in a bid to stop the spread of the Covid-19 coronavirus (2019-nCoV) remain in place.

If current trends continue, the LME anticipates that it will temporarily move to fully electronic pricing on Monday 23 March 2020, the exchange said, adding that prices would be calculated basis activity on its electronic trading platform LMEselect.

“Ring trading would then be suspended until conditions normalize in respect of Covid-19, at which point ring trading would resume. During this period, trading will be conducted via LMEselect and the inter-office market,” the LME said in a statement to members.

The LME ring, where global benchmark prices for metals are set, is the Europe’s last trading arena where prices are set by open-outcry dealing.

From Wednesday March 18, ring trading will take place from a disaster recovery site in Chelmsford, Essex rather than in London, where the UK government has said for people to avoid non-essential contact with others.

Category-1 members of the exchange, which have teams that deal in the ring, have been encouraged to use their dealing offices to continue to facilitate split-team operations, but this remains subject to minimized interaction where working from home is not possible.

The LME will hold discussions with Category-1 members of the exchange later on March 17 while both Category 1 and Category 2 members will speak via teleconference on Wednesday March 18.

While the LME’s relationship management remains in touch with members, it also said the revisions to its procedures will be implemented if deemed appropriate.

New ground for settlements
The LME’s electronic trial for the closing price of nickel in 2019 laid the groundwork for a potential broad-based shift to electronic settlement, but the LME admits that the full forward three-month price curve has never been produced electronically.

Similar to nickel, however, the exchange aims to use the volume weighted average price (VWAP) methodology for price settlement over a five-minute pricing period, whereby an average price is produced based on both volume and price throughout the day’s trading.

For official prices, which are settled during the LME’s second ring, the exchange will similarly implement a five-minute window that constitutes the last five minutes of the ring.

“The market should note that electronic settlement – given the complexities of the LME date structure – may generate a differently priced forward curve than would have been achieved on the ring and lead to a different set of market practices,” the LME said.

“The short-term market impact of a switch to electronic pricing should not be underestimated,” it added.