London, 16 January 2012

The clock is ticking for a potential sale of the London Metal Exchange ( LME), the venerable 135-year old institution that still dominates global trade in industrial metals. Tensions are rising. Three board members, each representing a ring-dealing member of the Exchange have called on others to join them in their opposition to a proposed hike in trading fees.

They got short shrift from Chief Executive Martin Abbott, who told reporters at a press conference last Thursday: "There is no provision for a revision of that decision".

This very public war of words is a breach of the "omerta", the code of silence, that normally governs disputes in what is commonly perceived as the last gentleman's trading club. These guys still trade open outcry, for heavens' sake! And they do it in a quaint circular ring, a vestigial memory of the Exchange's genesis in the Jerusalem coffee house off Cornhill in what is now the City of London.

Although anyone who has witnessed a ring-trading session may be forgiven for thinking it is nothing more than an institutionalised fight club. It's not for nothing that Exchange rules stipulate that a ring dealer must remain physically connected to his trading seat, even if only by the tip of a polished brogue. The chances of market melee translating into physical fisticuffs would otherwise be too great.

In truth, this popular (self-)image of the LME is as anachronistic as the toy red London buses sold by tourist shops across the capital. The only old "route-master" buses still operating are "Heritage Route" vehicles shuttling between London's most popular tourist sites.

So with the LME. Ring-trading still exists but is increasingly overshadowed by the Exchange's Select electronic trading system, a virtual fight club for the hedge funds, black-box operators and high-frequency traders who characterise any other financial market these days.

As with any other cliche, there is some historical truth to the popular image of the LME, but this current spat also reveals how far the market has moved from its old boy's club past.

THEN...

It's no coincidence that the three board directors who have taken their grievance public represent LME ring-dealing members, namely AMT, Sucden and Marex. The ring-dealers now have only three out of 12 seats on the LME Holdings board.

Twenty years ago it was very different. The 16-strong board at the end of 1991 was dominated by them. John Wolff, head of what was once a family company, Rudolf Wolff, was chairman. Raj Bagri, now Lord Bagri, also representing a family-owned member, Metdist, was vice chairman.

Alongside them sat the heads of five other ring-dealers: MG, Gerald Metals, Sogemin, Charles Davies and Billiton. Paul Shuman represented the new-fangled options market. Industry representation came in the form of "invited" representatives of Chilean copper producer Codelco, Swedish copper consumer Elektrokoppar, U.S. copper consumer Southwire and Rio Tinto. The latter was a token nod at metals other than the LME's then flagship contract. A figleaf of neutrality was provided by three non-metals board members.

Oh, and I almost forgot. The then newly-appointed Chief Executive, David King, was also on the board. But the core decision-making nexus was the ring membership, reinforced by shadow Mutual Interest Group, an alliance of ring-dealers who used their bloc vote to control board appointments.

Moreover, these were all companies whose primary business was that of metals trading. In many cases they were owned by metals producers. Bank representation was limited to Shearson Lehman's Jim Coupland, who (re-) joined the board in February 1992.

...AND NOW

It is testament to the inimitable Mr Coupland's longevity that he is still an LME board member, now representing Standard Bank, a Category Two, non-ring member of the Exchange. Also drawn from the same bank-heavy membership category are representatives of banking heavyweights, Goldman Sachs and HSBC.

Such banks have a different business model from pure brokers such as AMT, Sucden and Marex, using their balancesheets to fund mine projects, trade physical metals and even, in the case of Goldman, operate their own LME warehousing companies. They trade in multiple markets and can absorb the sort of fee hike planned by the LME.

Two of them, Goldman and J.P. Morgan , also control almost 20 percent of the LME's shares, giving them huge influence in any vote to sell that would require 75 percent shareholder approval. The current slimmed-down LME board includes just one industry representative, Gabriela Grillo from German family-controlled Grillo Group.

Making up the numbers are one "invited" member, two "independents" and a chairman, Sir Brian Bender, drawn from the ranks of the UK civil service rather than the trading community.

So when Martin Abbott says the decision to hike trading fees was a "decision taken by the board by a large majority", it's not hard to guess how the votes may have been cast. The much-diminished "old boy's club" simply got steam-rollered.

Oh, and lest we forget, Abbott is also on the board.

THE RISE OF THE EXECUTIVE

And the real fight right now is between the executive and parts of the LME membership. Back in 1991 David King oversaw an executive that numbered just 29 people. Joining from a background in accountancy, he was there to facilitate the board's decisions not influence them.

Martin Abbott's executive numbered 90 at the end of 2010 and, given the LME's drive into new areas such as selfclearing, it's probable that the number grew again last year.

The rise of the LME executive has been a long-running feature of the Exchange but Abbott's tenure has seen an acceleration of the trend. The executive committee is now as important as the board in setting the Exchange agenda. Sometimes an even smaller executive body is the key decision-maker. When the LME commissioned an independent review of the delivery problems in its warehousing system, the scope of the study was determined by a steering committee, comprising Abbott, Diarmuid O'Hegarty, deputy chief executive, and Robert Hall, head of physical operations. Both the board and the warehousing committee were by-passed because they were "conflicted".

The Exchange has come a long way from when the "old boy's club" ran things.

GLOVES OFF

The potential sale of the LME, a truly historical moment for the institution, is bringing to a head the long-running tensions between members and executive. The prize money is high, over 1 billion pounds ($1.53 billion), if the current speculation is anything to go by. And everyone is "conflicted", the members who own the shares and the executive, thanks to what the Exchange accounts term the "Shadow Equity Long-term Incentive Plan", namely options for "the Chief Executive and other selected members of staff"

The members have one key advantage, though. It is they who get to vote on any bid. So stand back and enjoy the contest. It could turn ugly. It looks like one contestant has just taken the gloves off.

Ends --

By Andy Home, Reuters market analyst – for Commodities Now with permission.

The views expressed here are his own.