The beat on this exchange is heavy metal
Michael Brown likes to call himself ``a poacher-turned-gamekeeper.'' Until March he was chairman of a firm trading on the London Metal Exchange (LME), then became the exchange's chief executive.
To the Malaysians, however, Mr. Brown seemed something of a poacher in late June. That's because of the way the exchange handled a record surge in the price of tin. The exchange set a 90 limit ($124) on the premium charged for tin for immediate (spot) delivery, which contrasts with prices for more-distant delivery (futures). That limit still holds.
The Malaysians, as the world's largest miners of tin, stood to benefit from the rapid price increase. The International Tin Council, a price-stabilization organization, has been having a tough time keeping up the tin prices. It would have enjoyed making good money by unloading on LME traders who'd sold tin short -- agreeing to deliver the metal without actually owning it -- some of its hundreds of millions of dollars' worth of tin it had accumulated in a buffer stock. By July prices had fallen well b ack from their peak.
Malaysian officials were angry. If the Tin Council had made some money on its buffer stock, it would be in a better position to continue to support prices. The officials began talking once more about setting up their own tin futures market in Kuala Lumpur.
This is an example of the importance of the London Metal Exchange in world economics.
``It is very significant to the metals industry,'' Brown says. ``It is a market used throughout the world.''
If copper prices fell badly on this market, the governments of Chile, Zaire, Zambia, and Peru could tremble. A sizable chunk of their revenues comes from taxing copper exports.
Conversely, should the prices of aluminum rise, the governments of such places as Guyana, Jamaica, and Australia would give three cheers.
Since the mining and use of metals is so significant economically, the excited voices of the buyers and sellers here during the last few seconds of a trading session can have an echo in cabinet rooms of governments and board rooms of companies around the world. It is the last prices offered as a bell rings the end of trading at sessions around noon which become the official prices of the day.
The London Metal Exchange trades in copper, tin, lead, zinc, nickel, aluminum, and silver. It is the biggest market in the world for tin and aluminum, but it is a lesser factor in silver.
The Commodity Exchange (Comex) in New York claims to dominate the silver market and to be ``on a par'' with the London market in copper. The LME says 70 percent of all copper mined is traded at official prices set on the exchange in London. The LME basically has a world monopoly on trading in lead, zinc, and nickel.
Trading is done in a ``ring'' in five-minute bursts for each of the metals successively at both morning and afternoon sessions.
Although it of course trades in futures, the London Metal Exchange regards itself as the key ``physical'' market for the metals industry. Companies representing producers, middlemen, and fabricators from Britain, continental Europe, North America, the Far East, and Australia are all present in the trading ring. Deals and contracts are settled directly between members.
This system tends to discourage speculators, who prefer the convenience of a clearinghouse operation.
New York's Comex is branded here as ``more speculative'' and prone to price manipulation. Comex officials chuckle a little at that label, considering the recent tin incident.
Traders on the Metal Exchange had been warned by Pieter De Koening, manager of the buffer stock, that he would insist on delivery of the actual metal specified in futures contracts that he bought. But some traders did not take him seriously and went short. Consequently, when spot prices went up rapidly, these traders were caught in a short squeeze that threatened to leave them financially breathless.
To fulfill their contracts, some would have to go to the main source of actual tin -- the International Tin Council's buffer stock -- and buy it at high prices to be delivered back at lower prices.
When the exchange intervened for a partial rescue of the shorts, the Tin Council buffer stock officials and other holders of actual tin lost potential profits.
Brown holds the action was necessary because the market had become ``disorderly.''
Whatever the situation, the flap has prompted the Comex to look into the possibility of trading in tin futures. It actually did trade in tin when it was founded 50 years ago, but dropped out of the business about 20 years ago.
If the comments of one Comex official are indicative, however, the exchange in New York is not likely to try again with trading tin futures. ``The market for tin is a relatively slow one,'' this official said. ``It would not appear to be appropriate for a United States futures market.''
Tin has relatively few sellers and buyers of metal. Speculators and those hedging against future price changes generally want a large number of businessmen active in a futures market. Otherwise, there is insufficient continuity in trading and risks go up.
In effect, that was the Metal Exchange's problem. The Tin Council's buffer stock could dominate the market. In any case, the council and the exchange have recently settled their dispute. ``That has now been solved,'' Brown says.
At another time, the European Community had to step in to break up a six-nation cartel of European zinc producers that had been fixing prices and trying to influence the LME free market.
In general, however, the exchange sees the prices on its markets as those set by the free play of supply and demand. With metals prices extremely low at present, producers, especially those in the developing countries, often wonder whether prices are manipulated.
So far the exchange, founded in 1877, has been self-regulated. It has 98 companies as members, of which 28 are ring dealer members. Some fraudulent trading has increased pressures for the creation of a government regulatory body, somewhat along the lines of Washington's Commodity Futures Trading Commission (CFTC).
``We don't want a CFTC, but something along those lines is necessary,'' says chief executive Brown. ``We in the industry have been unable to regulate the crooks. But probably it is taking a sledgehammer to crack a nut.''
Legislation is now before the British Parliament calling for the creation of a Securities Investment Board for the regulation of both stock and futures exchanges in Britain, with the help of self-regulating agencies within the financial industry. It is expected to become law on Jan. 1, 1987.