Ring Trading

Publication Date :

17 Jan, 2025

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Table Of Contents

What is ring trading?

Ring trading is associated with commodities trading and exchange, mainly metals, futures and options. It is conducted at the London Metal Exchange and occurs for a designated five-minute period known as rings. Such a trading setup typically depicts open-outcry floor trading practices.

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The whole trading structure includes a six-meter-diameter circle and two large display boards reflecting current commodity prices. Each ring-dealing member has a fixed seat. The trading sessions last five minutes, during which time the assistants, standing behind, pass orders to the ring dealing members and negotiate with customers on market conditions.

Key Takeaways

Ring trading majorly occurs in the London Metal Exchange, dealing in metal futures and options such as copper, zinc, lead, and aluminum, along with precious metals like gold and silver
It is a commodity trading system that involves a six-meter diameter circle, two large display boards for current prices and five-minute trading sessions called rings.
Ring trading is a similar form of floor trading where trading occurs through open outcry at a particular area on the exchange, also known as trading pits.
Every instrument or underlying asset has its timing fixed by the LME. Many people confuse ring trading with floor trading, but both are distinct in many aspects.

Ring trading explained

Ring trading is a venue-based trading in the London Metal Exchange in London, England. It is called ring trading because it is organized in a circle of a set diameter and also because it only occurs for five minutes called rings. It mainly operates on commodities exchanges such as oil, metal, agricultural products including precious metals like gold and silver and derivatives contracts such as futures and options of the same. The circle is also known as a trading pit, and during the active five-minute trading period, traders and floor brokers indulge in the traditional open outcry trading practices.

Each ring-dealing member has a fixed seat within the ring with an assigned assistant to stand and pass orders. Ring trading at the London Metal Exchange happens between 11:40 a.m. and 5:00 p.m., but inter-office telephone trading is available 24 hours a day. In contrast, the LME's ring sessions are divided based on the trading instrument. For instance, steel trading occurs in the first session from 11:40 a.m. to 11:45 a.m. (local time) and 1:10 p.m. to 1:15 p.m.

Ring trading is similar to floor trading but is different in many aspects. The trading ring plays an essential role in price discovery, which typically refers to the entire process of establishing the spot price of an asset. Still, most modern financial markets have switched to an electronic method orchestrated by matching systems and computerized exchanges.

Examples

Below are two examples of ring trading; the first one is a hypothetical scenario, but the second example is from the real world -

Example #1

Suppose Daniel is an investor who wants to trade in oil derivatives. He visits the London Metal Exchange and enters the trading pit with other traders. Two big price boards are reflecting the current commodity prices. As the five-minute trading session starts, all the ring members sitting with their assistants and other traders indulge in an open outcry, calling out prices and offers.

Daniel finds a ring deal member whose assistant is offering Daniel a reasonable price on oil futures derivatives. Within this five-minute session, both Daniel and the ring member lock in the deal through hand gestures and body movements and mutually agree on the price and date of the derivative. The rest is the same as how a derivative trade works. Now, this is a simple example of ring trading, but in the real world, there are many factors to be taken into account.

Example #2

For the second example, there is a Financial Times article from 2021 about the London Metal Exchange reopening its trading floor for ring trading after 18 months because of the pandemic. The LME has since kept the ring trading open and active, although many of the LME board members have proposed permanently closing the trading pit after the exchange continued to function through digital interfaces during the lockdown.

The original ring trading structure dates back to 1877, but after the reopening, a new structure was introduced that splits the daily price determination. This was done to appease old members who preferred using the traditional open outcry pit system. In case there is insufficient trading volume or liquidity and the member count declines below six, the LME agrees to close the trading pit.

Benefits

The benefits of ring trading are -

It is real time trading activity that occurs in the London Metal Exchange.
Ring trading encourages transparency in commodity trading.
In-ring trading, traders and customers are more accessible to price discovery and liquidity.
The whole set looks more real, active and stimulating when it comes to real-world physical trading.
It occurs for multiple commodities such as oil, metals and agricultural products, including futures and options.

Challenges

The challenges of ring trading are -

Limited hours and a five-minute ring period are some of the biggest challenges market participants face in ring trading.
Ring trading also comes up with regulatory issues and volatility problems.
It is an open outcry system which many new-age investors or traders do not like.
The whole trading activity is fast, and it involves hand movements and body gestures that can be confusing and ambiguous.