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Sandy shows human element is critical

Keywords: Tags  electronic trading, trading platforms, Hurricane Sandy, LME Select, LME, NYSE, INTL FCSTone, Fred Demler Andrea Hotter


NEW YORK — At a time when automation has led many to predict the demise of the trading floor, natural disasters, such as Hurricane Sandy, provide a bracing reminder of the crucial role humans play in the market.

When the New York Stock Exchange was forced to close Monday and Tuesday of last week, it was the first time weather had shuttered the market for two consecutive days since 1888.

But electronic trading markets in the United States were also paralyzed by the hurricane, with the decision taken to close them along with the open outcrypits. And it wasn’t the electronic systems that started up again with skeleton service on Tuesday. It was the staff at the brokerages and banks.

Many had slept in the city overnight, away from the problems of downtown Manhattan, and worked remotely on their telephones.

They didn’t need to trade on the electronic systems that many forecast will reduce humans to mere price-inputters within the next decade. They did what they do every day: They talked to their clients.

It’s an interesting example of the role of the trader at a time when many in the last remaining open outcry markets are forecasting the end of the trading floor. It’s particularly instructive for the London Metal Exchange, whose members have a long history of trading in a ring and a relatively short history of electronic trade.

When the LME launched its electronic platform, Select, in 2001, it didn’t take long before observers were predicting the end of the ring.

The LME and its ring-dealing members say that the open outcry floor will survive as long as the market demands it—in other words, as long as the users of the exchange see it as the most efficient way to trade.

The increase in LME Select volumes and emergence of algorithmic-based trading activity cannot be ignored. But despite a shift toward more automation, and outright business migrating to Select, the users of the market obviously see the floor and the phone as places they want to trade.

The LME’s complicated dates system makes it extremely difficult to replicate online.

Although some firms have left the LME floor in the past year—the former MF Global Holdings Ltd. through bankruptcy and London-based Natixis Commodity Markets Ltd. due to an exit from the commodities markets by its French parent—their floor teams have been picked up, and there are other new members waiting in the wings. 

New York-based INTL FCStone Inc. picked up the MF Global team late last year and became a ring-dealing member. The team did more floor business in September than it did in any single month as MF Global, global head of metals Fred Demler recently told AMM sister publication Metal Bulletin (amm.com, Oct. 19).

And recall that Hong Kong Exchanges & Clearing Ltd. (HKEx) chief executive officer Charles Li has said that he loves the date structure, in large part because of its utility to the physical market that gives the LME its legitimacy.

The LME—and its new owner, HKEx—will therefore be mindful of the need to ensure that the floor remains the price-setting mechanism it purports to be, and doesn’t become detached from the underlying physical markets. That’s a criticism several market participants have leveled against the LME as a result of the high premiums paid for prompt physical metal and the lengthy queues at exchange-approved warehouses.

The exchange and its members are undoubtedly aware that the risk of distorting prices is very serious. How they deal with the issue will be the key.

But, as the response to Hurricane Sandy indicates, it would be a foolhardy trader who sells the ring and the phone short. Because forecasts that electronic trading will end dealing on the floor have—so far, at least—always been wide off the mark.

A version of this article was first published by AMM sister publication Metal Bulletin.


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