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 Metal Exchange may add morning rounds of open-outcry trading for its unique futures contracts, senior trade sources say, as the new Hong Kong-based owners plot their first major move to hold off intense competition from their Shanghai rival.

Introducing a third, earlier, round of trading sessions would be the biggest shift in the way the 135-year old exchange operates since the launch of its electronic platform over a decade ago, and would run counter to the global industry trend toward shutting down trading pits in favor of faster, cheaper electronic platforms.

The trading committee, which is made up of representatives from the LME's ring and larger clearing members, has discussed an earlier beginning to London 'ring' and 'kerb' trading, in which 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 the Far East market," said one of the senior executives.

It is not clear when the exchange would make a final decision, although informal talks are likely to continue next week during the annual LME Week events. The new time could be launched as early as the first quarter, executives said.


According to early plans, the new morning session for the ring, as the LME floor is known because traders sit at fixed points in a circle, would be similar to the existing morning and afternoon ones: the LME's six major non-ferrous metals and two aluminium alloy contracts are traded sequentially in four five-minute bursts of open outcry, with 12 ring-dealing firms taking orders from their customers and their own back office.

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

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

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

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

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

"With the commercial flexibility of over 1,000 tradable prompt dates, the LME floor offers unrivaled forward market liquidity," says Michael Frawley, head of base metals and sales at ring-dealing firm Jefferies Bache.

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

But floor supporters hope that the new owner - the Hong Kong Exchanges and Clearing Ltd (HKSE) - will attract ring-dealing members from China. For its part, the HKSE is eager to boost income after it paid $2.2 billion to beat out IntercontinentalExchange to buy the LME, a steep premium for 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 II membership allowing it to trade electronically and in the telephone market but not in the ring.


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

The Asian reference -- a series of "benchmark" three-month prices published early in the London morning based on LME Select prices over a 15-minute window -- has failed to capture much attention, with the market still preferring to use the official prices for contracts, traders in the region say.

A morning ring session could help tap into China's growing retail 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 would generate a lot more physical business," a physical trader in Shanghai said.

FUTURE OF THE FLOOR The ring was the focus of much debate during the year-long takeover battle for the LME, with the last two bidders pledging to maintain three LME mainstays: the floor, contracts' unique date structure, and its complex warehousing network. The HKSE has promised to keep running the 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 now transacted on screens, the LME says.

But some 80 percent of so-called "date spreads", which form a huge part of the LME's business, are still executed on the floor 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, will become totally electronic when it shuts its New York pits in two weeks, 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 Alden Bentley)

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