James Moore: Metal exchange will not be able to resist the pot of gold


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The Independent Online

Outlook: The London Metal Exchange is the City's belle of the ball, with just about anyone with any interest in exchanges falling over each other to offer gold-plated dowries.

Sale details have been forwarded to a treasure chest full of suitors, with prices of £1bn or more being quoted, quite something for a company which made a profit of just £12.5m in 2010, down from £17.3m in 2009, despite the commodities boom.

In part this is down to the LME's rarity value. For those wanting to be in the shake-up when the next round of exchange mega-mergers gets underway (likely involving Asia), it is one of the last available opportunities to bulk up.

There are also lots of costs that could be cut, not least because of the way the LME conducts its business. Its mainstay is still an antiquated open outcry trading system, with prices being set by traders screaming at each other around a ring. Thanks to YouTube you can see it in action on a hilariously bombastic corporate video.

This little anachronism can't last, however much metals bods like to talk about how important it is.

All the same, there has been talk about some of the banks that own the LME attempting to block a deal and it shouldn't be all that surprising. Every time an exchange has demutualised, former members have screamed blue murder in the aftermath.

Complaints are made about prices (the LME's will go up), innovation and being forced to do business in new ways (there'll be quite a bit of that too), and even about simply not being asked around to have lunch with management so they can listen with rapt attention to ex-members' views (over fine claret).

Sometimes, former members turned customers have got so cross they've even set up new exchanges. A number of big investment banks did that when they felt that the London Stock Exchange wasn't tickling their tummies. Their Project Turquoise lost a packet and was then sold. To the LSE.

It is true that the LME's members do very nicely out of the status quo (and they love the fact that the Financial Services Authority leaves them well alone). But ultimately they will probably have to accept a suitor, whether it is the LSE or Icap or some other bidder. The pot of gold that will be waved under their noses is too big but they know that the costs of not acting may be bigger still. The exchange in its current form couldbe an irrelevance within a decadeotherwise.

So a deal should get done. Then the bellyaching will start. And go on, and on, until they all rust.