Roughly 10 months ago, the London Metal Exchange - an open-outcry-driven metals market - appointed Simon Heale its chief executive officer. Heale, who succeeded long-time LME CEO David King last July, recently sat down with WS&T Senior Editor Robert Sales to discuss a variety of subjects, including the evolution on electronic trading, the resilience of open outcry and impact that both Sept. 11 and the collapse of Enron Online had on the exchange. WS&T: The LME's electronic-trading system, known as Select, is based on software supplied by OM, the Swedish technology provider. Can you tell us what functional enhancements you and your partner have planned for Select in the coming year?
Simon Heale: We (recently) launched Release 2. Select went from start up to Release 2 in just under a year .... It's based on OM's Click system, (and) what we've got coming up this year is Release 3. But that's not a big upgrade. There are a couple of minor changes, but it's not changing the world .... Our view is that we provide the electronic system and the (trading) ring, and the members decided how they want to trade. That way we're kind of different from other exchanges, who force the issue.
WS&T: Do you mean the members decide how they use your electronic- trading system?
Heale: No, I mean the members decide where they trade. If they choose to trade in the ring, that's fine. If they choose to trade electronically, that's fine ... I'm not sure what trading expectations the members had. All I can say is that (since I've been here), the ring is still the primary place for trading.
WS&T: What's the LME's volume breakdown today in terms of electronic trading versus open-outcry trading, and what kind of growth has automated trading experienced at the exchange?
Heale: Well, (electronic trading) has been slightly slower because of Enron Online .... What has happened as a result of Enron Online's departure (from the trading landscape) is that the (LME's) volume has moved back to the ring. Most of the volume has moved back to the ring, not to electronic systems. I don't have exact numbers ... but I would have thought (the LME's volume) is still 85 to 90 percent ring and ring-related.
WS&T: What recent industry events have had the most impact on LME trading?
Heale: I've been at the LME for six months, and in that six months, there have been two seismic shocks: one was Sept. 11 and one was Enron's (collapse). What was interesting in both those situations is that the (exchange's) volume went straight to the ring. I think there are a couple of reasons (why) this happened. The first reason is that electronic systems, for an exchange like the LME, just haven't got the track record and, to be honest, the order depth to cope with something like that .... The second reason was how well the ring coped.
On Sept. 11, which was a horrendous day for all sorts of reasons, we decided to stay open. And the volumes were immense that day, and everything was (completed). There wasn't a hiccup ... People were distressed, but the business got done. And I think that was a tribute to the resilience of the ring. The ring absorbed the volume .... And another interesting thing is that since Enron Online closed, volumes went up a little bit on Select and Spectron. But overall volumes on the ring went up by much more.
WS&T: I'm not too familiar with Spectron. Can you tell me what type of system that is?
Heale: Spectron is a competitive system (to LME Select). They trade LME contracts. They are U.K.-based .... What basically happens is that (a buyer and a seller) execute their (LME) trades on Spectron. They then separately go to the LME matching system, and the (buyer and the seller) both enter the details of the order they've done, and it's then (settled) through the London Clearing House, as an LME contract.
WS&T: What challenges do you see ahead for the LME? What are you looking to accomplish this year?
Heale: The big issues, in the last year, have been the LME's demutualization, the announcement that (we) were going to create an electronic system, the launch of (Select) Release 1 and Release 2, and the change at chief executive. So what I'd call the really big changes have already taken place. This year, we're (focusing on) launching Select Release 3. But that's not going to be earth shattering .... We've also launched a new aluminum contract, which (started) on the fourth of March. And we've suspended the silver contract. So the stuff we've announced and are actively working on is what I'd call diversification, housekeeping and building on existing strengths. Nothing we've currently got planned for this year is what I would call transformation.
WS&T: Do you have any goals in terms of volume you'd like to see on LME Select by the end of this year?
Heale: It's not an issue for us. We very much want the members to decide. My only goal is that if they are going to use an electronic system, I would like them to use Select.
WS&T: From what you've told me, it seems like the volume at the LME is not going to go all-electronic anytime soon. Do you think the majority of the volume will continue to flow to the LME's floor?
Heale: I hate to be absolute, one way or the other .... My insight is people have been saying the ring will go (away) for years. But the ring is still there, and whenever we have a (market) shock, it gets stronger and handles the shock very well. So I think the ring will be around for a while .... Within the States, there are open-outcry exchanges that are still confident about their future, as we are. So the answer is, in the short-to-medium term, I think the ring is there. Will it be there in 10 years time? I don't know, but we'll face it year by year.
WS&T: Have you formed any recent alliances with any other exchanges or any third-party technology vendors?
Heale: The answer is no. We have not looked at that, and we are not currently looking at that, because we have got enough on our plate at the moment. We do have an alliance with OM. And the relationship with OM is good, and I'd be interested in working with them over the next couple of years to see whether they have any ideas about how we can leverage the investment we've made. But we have not started having those discussions yet .... We've invested 15 million pounds in Select, so we want to give it the best possible chance of trading the greatest volumes.
WS&T: So you've invested 15 million pounds in Select to date?
Heale: That's the cost of (our deal with OM). It's a three-year contract, and then we'll renegotiate. So over the three years, the full development, set up and operating costs (of Select) is about 15 million pounds .... The deal was initially struck in September 2000.
WS&T: What trends do you see emerging in your industry over the next year or two?
Heale: I'm reasonably upbeat that you're going to see increased activity, because the metals market is often a forerunner of economic activity. Both the metals industry and the economy have been through a tough time .... And I'm reasonably confident that you're going to see, in the next six to nine months, the first flickers of life in the metals price, which will increase volatility and increase volume.
WS&T: Are there any technology trends you see emerging?
Heale: I think for us the big jump was Select. Currently, Select (is available) over dedicated lease lines. So one question is, could we provide Internet access? Is that possible? ... Also, should we ever have broader distribution of Select? That's not on the agenda at the moment, but that's an issue because (the London International Financial Futures and Options Exchange's) Liffe Connect (trading system) is distributed more broadly.
WS&T: Will the LME, as a demutualized exchange, ever sell equity to any investors outside of its members?
Heale: We have, in principle, already demutualized. We were member owned, and instead of membership rights, members were given equity. But the equity available was only enough for the current trading members. So it was not a free float of shares ... (So) we're still a members-owned exchange, focusing on the members, and the members (deliver services) to their clients. We have no plans to change that, but maybe it's something we should look at in due course.