Bucking the trend, LME looks at expanding floor trading


* Morning floor trading planned to capture Asian business

* Ring floor may be expanded for new members, extra staff

* First major move by LME's new owner

By Josephine Mason and Susan Thomas

NEW YORK/LONDON, Oct 11 (Reuters) - The London MetalExchange may add morning rounds of open-outcry trading for itsunique futures contracts, senior trade sources say, as the newHong Kong-based owners plot their first major move to hold offintense competition from their Shanghai rival.

Introducing a third, earlier, round of trading sessionswould be the biggest shift in the way the 135-year old exchangeoperates since the launch of its electronic platform over adecade ago, and would run counter to the global industry trendtoward shutting down trading pits in favor of faster, cheaperelectronic platforms.

The trading committee, which is made up of representativesfrom the LME's ring and larger clearing members, has discussedan earlier beginning to London 'ring' and 'kerb' trading, inwhich each metal contract trades one by one, then all at once,three executives at ring-dealing firms said.

"The LME is talking about a morning kerb to tie in with theFar East market," said one of the senior executives.

It is not clear when the exchange would make a finaldecision, although informal talks are likely to continue nextweek during the annual LME Week events. The new time could belaunched as early as the first quarter, executives said.


According to early plans, the new morning session for thering, as the LME floor is known because traders sit at fixedpoints in a circle, would be similar to the existing morning andafternoon ones: the LME's six major non-ferrous metals and twoaluminium alloy contracts are traded sequentially in fourfive-minute bursts of open outcry, with 12 ring-dealing firmstaking orders from their customers and their own back office.

The additional kerb session would likely be shorter than inthe current kerbs, which last for just over two hours.

The focus on the floor may extend to creature comforts aswell - early discussions have taken place about refurbishing andexpanding the ring to make room for any additional staff neededfor the longer day or new members, senior traders have said.

The LME declined to comment on plans to extend floor hoursand overhaul the floor space.

The move would please advocates of the ring, including manyof the big brokers and banks, who believe open outcry tradingstill has a role in a global market increasingly dominated byscreen trading and algorithmic execution.

They argue this is especially true of the LME, whosecontracts are based on hundreds of specific forward dates,rather than on simple monthly delivery system of most futurescontracts. Live brokers are often better able to manage thecomplex delivery system, supporters say.

"With the commercial flexibility of over 1,000 tradableprompt dates, the LME floor offers unrivaled forward marketliquidity," says Michael Frawley, head of base metals and salesat ring-dealing firm Jefferies Bache.

The question is whether the new session will add liquidityfor the LME, which has seen its share of the global copperfutures market eroded by both the Shanghai Futures Exchange,where Chinese speculators are active, and CME Group ,whose active electronic platform and familiar futures structurehas attracted high-frequency traders.

But floor supporters hope that the new owner - the Hong KongExchanges and Clearing Ltd (HKSE) - will attractring-dealing members from China. For its part, the HKSE is eagerto boost income after it paid $2.2 billion to beat outIntercontinentalExchange to buy the LME, a steep premiumfor a market that turned in a profit of $12 million last year.

In April, BOCI Global Commodities, a unit of Bank of China,became the first Chinese LME member with a Category IImembership allowing it to trade electronically and in thetelephone market but not in the ring.


If the LME pushes ahead with an early session, it would bethe most concrete effort yet to increase business from Asianinvestors since the exchange extended electronic Select tradinghours in 2006 and introduced Asian reference prices in 2011.

The Asian reference -- a series of "benchmark" three-monthprices published early in the London morning based on LME Selectprices over a 15-minute window -- has failed to capture muchattention, with the market still preferring to use the officialprices for contracts, traders in the region say.

A morning ring session could help tap into China's growingretail and investor base. Traders and commercial firms in China,the world's top metals consumer, are already major LME users.

"If you had a five-minute session (in the morning), we wouldgenerate a lot more physical business," a physical trader inShanghai said.

FUTURE OF THE FLOOR The ring was the focus of much debate during the year-longtakeover battle for the LME, with the last two bidders pledgingto maintain three LME mainstays: the floor, contracts' uniquedate structure, and its complex warehousingnetwork. The HKSE has promised to keep runningthe floor until at least 2015.

Launched 11 years ago, Select helped modernize the exchange,and as much as 80 percent of vanilla three-month trades are nowtransacted on screens, the LME says.

But some 80 percent of so-called "date spreads", which forma huge part of the LME's business, are still executed on thefloor or over the phone, the LME says.

The ability to transact face to face is increasingly rare.ICE, which shut down London's International Petroleum Exchange(IPE) trading floor years ago after buying the exchange, willbecome totally electronic when it shuts its New York pits in twoweeks, ending a 140-year tradition.

"With ICE, (longer floor hours) wouldn't be in discussion,"said the first executive.

(Additional reporting by Melanie Burton; Editing by AldenBentley)

((Josephine.Mason@thomsonreuters.com)(+1 646 223 8925))