(Bloomberg) -- Since the 1800s, the London Metal Exchange’s iconic trading floor endured world wars, scandals, ruinous defaults and the onrush of algorithmic trading that’s made other open-outcry markets obsolete. Yet after all that, it may not survive Covid-19.With coronavirus cases surging in the U.K. capital, the LME laid out proposals Monday to keep its floor, known as “the Ring,” closed until at least early 2021. It’s also considering technical tweaks that could stoke the debate about whether the usually raucous space, which underpins $50 billion worth of metals trades each day, should reopen at all.Since March, when the LME closed the Ring, benchmark prices for metals such as copper, aluminum and zinc have been set by deals struck over the telephone or electronically, rather than in the shouting match of the Ring.The exchange has said the open-outcry floor won’t reopen until social distancing ends, a vaccine becomes available or a new technology emerges allowing traders fluent in barked commands and singular hand gestures to congregate safely. None of those conditions have been met.“It’s going to be a pretty unpleasant winter,” LME Chief Executive Matthew Chamberlain said in an interview. “It’s becoming clear that we’re not coming back for at least another six months -- unless there’s some major breakthrough on instant testing or something of that nature.”If it weren’t for the pandemic, the global metals industry would be congregating in London this week for a hectic round of meetings, investor briefings and cocktail parties organized around an annual gala dinner hosted by the LME. Instead, Chamberlain laid out his proposals during a virtual seminar.Already, a gloomy mood has descended over the LME’s Ring dealers, the firms who trace their history back to the metal traders who first drew a circle in the sawdust of the floor of the Jerusalem Coffee House in the City of London in the early 19th century.“Part of our revenue stream has just gone,” said Andy Gooch, an executive director at ring dealer CCBI Global Markets Ltd.An executive at another broker, who asked not to be named discussing private information, estimated that volumes handled by its Ring team have dropped by as much as 75%.When the Ring first closed in March, many hoped it would be a short outage. Now, Ring dealers are wondering whether to keep on teams of people whose role is no longer clear.Ring dealers and the LME have been discussing ways to reopen the floor, where nine traders at a time sit on red leather benches, surrounded by dozens of clerks and salespeople. But they’ve found no way to do so safely, according to people familiar with the matter.Proposals included installing a new ventilation system and supplying traders with full-face visors, or even building a temporary outdoor trading floor adjacent to the LME. The exchange considered installing rapid virus-testing systems, but it isn’t satisfied it could reliably carry out the hundreds of tests needed each week, the people said.One ring dealer, CCBI Global Markets Ltd., laid off some of its staff on the floor, according to people familiar with the matter. Since the closing, Marex Spectron Group Ltd., one of the largest dealers on the floor, has accelerated its efforts to develop other areas of its business, recognizing the threat that Covid-19 poses to the future of the Ring, President Simon van den Born said.“Like many others in this market, I’ve thought ‘One day, this thing might go, because it doesn’t look and smell like what now goes on in the rest of the world,’” van den Born said. “You need to plan for that eventuality by investing in technology.”The Ring’s detractors have long argued it’s an anachronism that should be consigned to the history books alongside other trading floors like the International Petroleum Exchange in London and the New York Mercantile Exchange.For a long time, its supporters argued that the Ring was the only way that prices for the LME’s complex system of daily deliverable contracts could be established. Already, the past six months of relatively glitch-free trading has undermined that argument. The LME’s latest proposals could further reduce its power.With the floor closed, the LME has been setting prices for its most-active contracts electronically, but it’s also been taking phone-based trades into consideration when deciding how to price less-liquid contracts.The bourse now is proposing a more systematic approach by giving predetermined weightings to factors such as the size or timing of the trades. While it’s a temporary measure and the LME will discuss the proposals with the market before making a final decision, the consequence could be that algorithmic traders and other specialist brokers end up wrestling pricing power away from Ring members.The LME will form a working group with Ring dealers and other users to discuss the plans before making any final decisions.In turn, it may prove difficult for Ring dealers to entice clients back to the floor once it does reopen. Already, some are preparing for such an outcome.“What used to be a floor clerk yesterday needs to be an algo programmer today,” Marex’s van den Born said. “The temporary closure of the LME floor, for us, has accelerated that evolution.”Chamberlain said that he’s committed to reopening the Ring, yet he acknowledged that a debate about the future of the market is becoming more appropriate as the pandemic lingers.“We clearly said at the beginning that our aim was to reopen the Ring, and that’s still the state of play,” Chamberlain said. “But as time goes on, I believe it is valid for us to continue to evolve our electronic trading and pricing capabilities. If that leads to a broader conversation around electronic versus Ring pricing, we won’t shy away from it – but we’re going to be guided by our market on those discussions.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
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