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 wasnt
the electronic systems that started up again with skeleton
service on Tuesday. It was the staff at the brokerages and
Many had slept in the city overnight, away from the problems
of downtown Manhattan, and worked remotely on their
They didnt 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.
Its 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. Its
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 didnt 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
itin 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 LMEs complicated dates system makes it extremely
difficult to replicate online.
Although some firms have left the LME floor in the past
yearthe 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 parenttheir
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 LMEand its new owner, HKExwill therefore be
mindful of the need to ensure that the floor remains the
price-setting mechanism it purports to be, and doesnt
become detached from the underlying physical markets.
Thats 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
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 haveso far, at leastalways been wide off
A version of this article was first published by AMM
sister publication Metal Bulletin.