By Kevin Morrison
The colourfully attired oil traders who work on the floor of the International Petroleum Exchange (IPE) do not have to look far to see what the future may hold.
Each day as they walk in and out of their offices near the Tower of London, they can see the former trading floor of the old London Commodity Exchange. Here, as recently as 2000, cocoa, coffee and sugar futures were bought and sold by traders in colourful jackets.
Liffe, which bought the London Commodity Exchange in September 1996, closed the trading floor when it moved fully to electronic trading. This left floor traders with the choice of finding another job or adjusting to the new way of trading. The old commodity exchange floor is now the London home of Instinet, the US electronic share trading service.
The debate over electronic trading at the IPE became more tense last week when about 25 independent traders, known as “locals,” boycotted trade because of plans to shorten the opening hours of the trading pits. Locals trade on their own account and add significant volumes to the market. The day of the protest saw daily volumes drop by almost half to about 58,000 contracts.
“We have demonstrated that we have an important role to play at the exchange and that [the IPE] management can’t ignore us,” said one trader, who did not want to be named.
The boycott did little to boost electronic trading on the day. This has remained flat at about four per cent despite the move last October to extend it to opening at the same time as pit trading from being just an after-hours service.
Even though oil companies, physical oil traders and investors have not embraced electronic trading, the IPE, home of the Brent crude futures contract, is determined to go fully electronic. Last week, the IPE board endorsed a plan to shorten the trading pit’s opening hours, and extend the trading hours of the electronic platform.
The IPE management is proposing that the pit’s opening time should change from 10.02am to 2pm, which would match the opening of the pit trading hours on the New York Mercantile Exchange (Nymex), IPE’s bigger rival. The closing time would remain at 7.30pm. Electronic trading would start at midnight instead of 2am, with the close unchanged at 10pm.
To make this reduction in pit trading hours more palatable the IPE’s management said that it would guarantee that the pit would remain open for a ‘number of years’.
The latest push to reduce pit trading hours appears to honour a promise, made in 2001 at the time of the takeover offer, by the IPE’s parent, the IntercontinentalExchange (ICE), to pay $67.5m to its B shareholders in return for a move to purely electronic trading.
But in June the ICE, an Atlanta-based online commodities exchange, dropped this condition for the payment to B shareholders, most of whom are the broker-user members of the London-based exchange.
The current offer is unconditional and ICE’s management says the payment is not related to the proposal to reduce the pit’s opening hours. However, some B shareholders say the issues of the payout and the reduction in open-outcry trading hours cannot be separated.
One B shareholder, who did not want to be named, said although there appeared to be support for the payment among ICE’s A shareholders, there were some shareholders who wanted some concessions in return.
“Bearing in mind that this payment was originally based on the IPE going fully electronic, some A shareholders would like to see further movement on that strategy before they approve any payout to the B shareholders,” said the B shareholder.
ICE is expected to call an extraordinary meeting to vote on the payout to B shareholders.
The staged migration to electronic trading for the IPE is not without risks.
“The IPE had better be careful, because if they upset too many members that plays into the hands of Nymex, which is ready at any time to launch its own Brent futures contract to take advantage of any division that may emerge,” said one IPE floor broker.
Nymex, for its part, has no plans to go fully electronic, as floor traders in New York are against any move to curtail pit trading hours, and they have significant influence on the Nymex board.