The intricacies and arcane practices of the London Metal Exchange have once more been under the spotlight this week, after it was announced that a decision to end the traditional open-outcry method of trading had been reversed.
The LME plays a key role in setting metals prices, but precisely how it sets those prices has been the subject of much debate over the past couple of years.
The coronavirus crisis brought matters to a temporary head when open outcry was rendered impractical for health-related reasons, but the apparent continuing success of the exchange in fully electronic mode initially encouraged management to put a formal end to it.
It turned out not to be so easy.
A consultation document sent out to a large number of the exchange’s customers returned mostly negative comments. The thinking is that smaller participants can be better represented by open outcry and pricing, and that larger players will be able to exert too much influence if the whole process is digitized.
Nevertheless, the exchange hasn’t done a complete U-turn. Open-outcry will be allowed during the middle of the day, but the closing session will remain electronic. The clinching argument was that for the electronic sessions there were significantly more participants.
Will it make any difference to metals pricing itself? That’s unlikely. The open-outcry system does allow a bit of visibility when it comes to the price-setting process, but the LME has in any case always been a relatively insular institution and the general investor is unlikely to appreciate any real difference.