Martin Abbott, the new chief executive of the London Metal Exchange, has many issues to contend with: the expansion of electronic trade; turning a cosy members’ club into a for-profit business in an increasingly competitive environment; and expanding the exchange beyond its traditional areas to name three.
Future changes at the exchange will be a talking point at the annual LME dinner on Tuesday, between the bottles of wine and post-dinner cognacs.
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Mr Abbott, in his first interview since taking over the helm last week, says he is not about to change tenets of the world’s largest base metals market, the trading floor – also known as the ring – or the date structure of LME metal contracts.
Electronic trade is likely to grab an increasing share of the LME’s total trading volumes. The LME does not publish a breakdown of trading patterns between floor, electronic and voice.
But some brokers estimate that the exchange’s electronic trading system, LME Select, accounts for up to 80 per cent of trade in the benchmark three-month contracts for copper, aluminium and zinc.
At the LME contracts are bought and sold based on a specific day; most other commodities are bought and sold for a specific month. Given this unique date structure, much of the world’s metals trade is still conducted through the ring. Brokers say the date structure is not suited to electronic trade.
“The floor will remain a very important part of the LME. I cannot see why there is any need to change when a large part of our market continues to use the floor,” said Mr Abbott.
Although he is a supporter of the floor, the new LME chief executive has a mandate to expand the venerable exchange’s businesses. This means the expansion of LME’s electronic trading, one of the biggest growth engines for global commodity exchanges in recent years. It attracts customers such as hedge funds and managed futures funds, who only trade via computers.
Proof that the ring is no longer central to the exchange’s growth is the fact that the number of brokers on the floor has reduced to 11, fewer than half the number two decades ago.
Credit Suisse, UBS and Bear Stearns have become members of the exchange in the past year, and have all decided to offer voice and electronic trading and clearing services.
The LME is also facing competitive pressure from, among others, the New York Mercantile Exchange (Nymex), which plans to launch a number of electronic-mini (also known as e-mini) contracts in copper and aluminium from early next month.
The LME plans to launch its own e-mini contracts in November.
This type of contract appeals more to financial players than it does to the LME’s traditional base of industrial users.
The key to the success of e-mini contracts is the distribution of products.
Nymex’s link-up with the Chicago Mercantile Exchange’s Globex electronic trading system gives it a distribution to potentially thousands of users. The LME has only about 500 users on its Select system.
Mr Abbott plans to expand this network by offering it to the customers of LME members, so that they will be able to executive their own trade. Members will then clear their trades.
In addition, Reuters, the news and financial trading systems vendor, plans to launch a feature on its terminals from next month that will allow users to send an order to buy or sell LME metals. This move will help more customers trade electronically.
Mr Abbott acknowledges that the world is becoming more electronic, but he does not see that this will force the LME to change the daily term structure of its metal contracts to a more generic monthly contract as is popular in the broader commodities world.
“I cannot see a time when we will need to change the daily forward price structure of the LME contracts,” he says, adding that to do so would rem
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