London 08/09/2015 - The sudden withdrawal of JP Morgan (JPM) from the London Metal Exchange (LME) trading floor has reignited concerns over ring trading and may bring about the closure of Europe's last open-outcry floor sooner rather than later, industry sources said on Tuesday.
"This is a real big blow for morale down here - they are a big player and it will be noticed straightaway," a long-standing floor trader said.
JPM was one of the LME's leading ring dealer members (RDMs). Late on Monday, after floor trading ended for the day, it relinquished its trading status on the ring to become an associate broker clearer member (ABCM) from Tuesday.
"We were expecting them to leave as they have exited the physical side of the business so it was only a matter of time but this was quicker than we thought. It has reopened old wounds as to the lifespan of the ring," another trader said.
JPM's trading operations had adapted to the point where it was more naturally fitted to a model of screen and voice broking their sizeable business, others noted. This will continue as an ABCM.
"That business is still going to come to the market but it will be through the screen or the messaging systems," another veteran trader said.
ABCMs have all the rights and privileges of LME membership but cannot trade on the open-outcry floor. Their ranks include Goldman Sachs, HSBC and Deutsche Bank, as well as previous RDMs such as Barclays, Jefferies Bache and Natixis.
AND THEN THERE WERE NINE
With JPM's exit, the number of RDMs falls to just nine - in the 1980s there were around 30 floor-trading companies.
"Their model of business was not perhaps right for the floor but [the floor] has lost what was historically one of its biggest liquidity providers now," another senior floor trader said.
The metal trading unit that became JPM dates back to the mid-1970s when Germany's Metallgessellshaft became a ring trader. As MG Metals, it acquired several other companies, including founder member Rudolf Wolff, warehouser Henry Bath and Billiton Metals. MG itself was acquired by Enron, which in turn, was purchased by Sempra.
But it was the $1.7-billion purchase of RBS Sempra Commodities' European and Asian businesses in 2010 that grew the firm into one of the biggest players in metals and energy. It was the largest single shareholder when the LME was sold in 2012 to Hong Kong Exchanges & Clearing (HKEx).
But in 2013 parent company JPMorgan Chase & Co opted to pursue strategic alternatives for its commodities business, including its physical metal trading and warehousing operations. In 2014 it sold its physical commodities business, including Henry Bath, to Mercuria Energy Group Ltd but at the time retained the futures business.
The LME floor is the last of its kind in Europe - the exchange also operates an electronic market and an inter-office phone market. With RDM numbers in single figures, there are likely to be increased concerns over the viability of the open-outcry model.
"It is a crunch time now - the LME is making all the right noises about the floor but if another one goes then it will be a worry," another trader said.
The LME has reiterated its commitment to open-outcry. It is moving to new premises later this year that include a trading floor.
"The ring will remain for as long as it continues to serve the market and the market continues to use it," LME CEO Garry Jones said.
The vast bulk of the LME's daily business is not transacted on the floor - rather it goes on screen or phone. But the daily reference prices and closing valuations are floor-discovered, which is a key factor in its longevity.
(Additional reporting by Kathleen Retourne, editing by Mark Shaw)