Ring trading is a mechanism used by the London Metal Exchange (LME) for certain forms of investment business. Trading activity takes place in five-minute “rings” around a circle with a six-meter diameter (a specific kind of trading pit), with two huge display boards that indicate current values. Each ring-dealing participant has a set seat within the ring, behind which an assistant is allowed to stand to pass orders to the participant and communicate with clients about the state of the market.
Any sort of trading pit may be referred to as ring trading in a broader sense.
KEY TAKEAWAYS
- The London Metal Exchange uses ring trading to undertake specific forms of financial business.
- In this location, trading activity takes place in five-minute intervals inside a circle with a six-meter circumference and two sizable display boards that reflect the current prices.
- Ring trading may also refer, in a broader sense, to open outcry floor trading that takes place in trading pits.
How Ring Trading Works
Trading occurs on the London Metals Exchange during predetermined five-minute blocks known as “rings,” during which floor brokers and traders conduct open outcry trading in a six-meter-diameter pit.
For example, steel trading occurs during the first session from 11:40 am to 11:45 am (local time) and 1:10 pm to 1:15 pm, and it ends trading at 4:20 pm. Ring sessions are divided by trading instruments. Inter-office telephone trading is available around-the-clock, with ring trading at the LME taking place between 11:40 and 5:00 pm.
Each ring dealing member has a fixed seat inside the ring, however an assistant is allowed to stand behind the seat to pass orders to the ring dealing member and to communicate with clients about market circumstances.
Rings as Floor Trading Pits
A ring, sometimes known as a trading pit, is a place on the trading floor of an exchange where trades are actually performed. The preferred term for the commodities market is a pit, which refers to the circular or hexagonal structure (thus, ring) where traders can deal with a counterparty.
The trading ring is crucial in supporting price discovery for open-outcry trading floors and methodologies. The entire procedure, whether explicit or implied, through which the spot price of a good or service is determined is known as price discovery. When done correctly, it determines the fair price of a security, a commodity, or a currency based on a number of variables, primarily the supply and demand conditions.
However, electronic procedures orchestrated through computerized exchanges and matching systems have largely replaced open-outcry as a system of price discovery in today’s financial markets. Many financial markets still have a nostalgic history surrounding the rings, pits, and colorful individuals that populated trading places in the past.