It used to be a pretty simple business; you made money from
commission, from jobbing – in all its guises - from
interest on netted-off margin cash and from a few other little
extras, like warrant swaps and so on. For those with strong
balance sheets and available cheap cash, warrant financing was
Are all those avenues still open? I’m not sure
that they are.
On the surface,
the ballooning of LME volumes
in the last few years should
be good news on the commission front, but that only tells half
the story. Parallel with the increase in volume has come an
erosion of commission rates, a move which picked up its pace
hugely with the arrival of the order-routing systems.
Now, in a quote-driven market, I can fully understand the
concept of commission-free trading –
you’re choosing the bid-offer spread
you’re making, so why should there be a commission
added as well, goes the argument. I’ve got a fair
amount of sympathy with that approach.
But, by accident or design, the LME is now effectively an
order-driven market, with the electronic trading platform
providing a very high degree of transparency. But at the same
time as the old market-making spread has gone, commission rates
have also continued to decline – on the basis that if
the customer is doing all the work of entering and monitoring
orders on line, why should he also pay a high commission?
Again, I can’t fault the logic, but it surely does
create an issue for metals brokers.
In an ideal world, the decrease in commission rates would have
been compensated by the increase in volume. I would need to be
convinced that that has happened.
What has come out of this, though, is something like the tale I
was told recently by a senior executive at a major mining
One of his brokers, unhappy at the amount of commission the
miner in question was paying him, called a meeting to tell the
client that from now on he was going to have to pay a minimum
of $25,000 a year to keep the line open.
In reply, my friend simply showed his list of a dozen other
banks and brokers, and the credit lines they gave him, and
suggested that this probably wasn’t really the way
My friends, this is a "commodity" market, in both senses;
asking your client to pay for the same service he gets
elsewhere for free is unlikely to be successful.
I have also heard, this one not at first hand but I believe it
to be true, of brokers asking for an up-front payment before
they will begin working on setting up a line for a client.
Now, I am the first to acknowledge the amount of time and
effort required to get through everything required these days
– due diligence, know your customer, and so on, but I
wonder if this is the best way to adapt to changing
The style of jobbing has changed, as well. Whereas in the past,
if your account exexs were worth their jobs, they would have a
steady feel for what the underlying market participants were
thinking and what their intentions might be.
That then helped a competent dealer to set his jobbing book in
the right direction. Not foolproof, obviously, but helpful.
(Just for the avoidance of doubt, I’m not talking
about front-running here. I’m talking about using
the resources at your disposal.)
Now, what’s available? Well, you can watch the
screen run up and down, and try and get on the back of the
momentum traders. Or you can stick your head down the
lion’s throat, when a fund calls you and says, "I
don’t like what’s on the screen at
the moment. Make me a 1,000-lot copper market."
That’ll be good, taking over the risk he
doesn’t like, for 25 cents per tonne, with no
I’ve lost count of the number of times
I’ve heard from brokers that the market is moving
up and down, but "it’s all on line and we
don’t know why, or who’s doing
If we accept that interest income hasn’t really
changed, and that warrant financing is still there, although
with the bank/trader/warehouse monoliths lurking I
can’t see that holding out too much hope for the
independent for much longer, I think the picture looks quite
bleak for the LME broker/dealer as a stand-alone entity.
I may be wrong.
Perhaps they had a great year in 2010.
After all, volumes across the exchange were up again, and
volatility was certainly there, meaning prices moved a lot. In
those circumstances, the way the market used to be structured,
it should have been a golden year.
So what do I think the answer is? Well, first off, and
I’ve addressed this issue before, account execs
need to concentrate on selling systems;
get your screen in front of the client
, and at least you
have a chance.
Next, spread your wings. Forget being an LME broker; the
expertise is no longer in knowing the non-ferrous metal market.
You have to able to offer the milli-second fastest trading
platform, and your customer wants to trade a raft of markets
across it. And make sure you can share your administrative and
back-office costs across as wide a field as possible.
You have to be a generalist; the age of the specialist in our
market is sadly coming to an end.