Trading and Settlement – Then and Now
David Gornall, Senior Consultant, LBMA, who at the time of the publication of the first Alchemist was working for Sogemin Metals Ltd recalls what it was like trading in the dealing rooms from 1995 through to 2002. Stephen Pender then picks up the story when his trading career began at J.P. Morgan.
David Gornall: The dealing rooms from 1995 to early 2000
At the time of the very first Alchemist in 1995, I worked for Sogemin Metals Ltd, part of the London Good Delivery refiner Umicore. Trading precious metals in the late 1990s at a refiner highlighted stark differences to today’s world, especially when comparing it to life within a bank.
For example, we never mentioned the words ‘balance sheet’, ‘liquidity’ or ‘tier one capital’ as much as we do today. This was common in all refinery owned London Metal Exchange (LME) member trading companies, where the early days saw the refinery members outnumber the banks.
The chosen method of client communication was by phone and the preferred business continuity plan didn’t involve a disaster recovery site, but would normally mean taking temporary office space in a hotel! How times have changed.
The dealing room at Sharps Pixley circa 1982.
Verbal orders caused confusion. The German office would often place orders in German. Kauf (buy) and Verkauf (sell) were often easily confused in a noisy dealing room. Even a foreign accent could cause issues. When a client told his sales contact, “if you cannot buy it, you can sell it”, the sales person was rightly confused until he understood that the intention from the client was to cancel the order – the client had not realised he had to place the stress on the first syllable of cancel and not the last!
Electronic trading had only just started and, at the time, was considered a fad by many smaller houses as they tried in vain to access systems that required more credit than they were able to furnish. That all changed when they discovered prime brokerage.
Excel may have been around in the late 1990s, but analytical traders much preferred to record price history on their handwritten charts, which were often several metres long!
THE GERMAN OFFICE WOULD OFTEN PLACE ORDERS IN GERMAN. KAUF (BUY) AND VERKAUF (SELL) WERE OFTEN EASILY CONFUSED IN A NOISY DEALING ROOM.
They all possessed a strange tool known as a parallel ruler, which was basically two rulers joined together on hinges, designed this way to capture trading channels and extend ranges.
Most dealing rooms were loud places with constant verbal inter-office communications. There would be ‘hoot-n-holler’ boxes everywhere for every purpose.
You weren’t expected to put your cigarette down and walk over to another desk to speak to someone; instead, you could simply shout directly at another desk or you could use the speaker systems. From the softs desk to the metals desk, from the metals desk to other branch offices, added to that the external brokers’ commentaries, it was a cacophony of noise.
From a price perspective, 1995 started with producer hedge buybacks that saw gold move above $400 for the first time since 1991. That kept all the brokers very busy, with five-year forwards being asked for on as many occasions as the rest of the curve.
CENTRAL BANK GOLD SALES
In 1996, the IMF decided that it would sell a portion of the gold that it held (see Alchemist 5, October 1996, ‘Howard Davies focuses on EMU issues’). This started a domino effect of reviews by various governments which led to Switzerland, the Netherlands, Germany and Belgium announcing central bank gold sales (see Alchemist 8, June 1997, ‘Gold and Central Banks – A Change in Attitude’ and ‘LBMA Seminar – Dealers Dream or Dealers Nightmare’). The UK duly followed suit in 1999 (see Alchemist 16, June 1999, ‘Gold Auctions – The Way Forward’).
It was during that year that the euro was launched and the European Central Bank was created, with 15% of its reserves held in gold. But gold will be remembered better in 1999 for the creation of the CBGA (Central Bank Gold Agreement). This would limit signatory states to sales of gold to a maximum of 400 tonnes a year.
Although gold may not have provided too much in the way of interesting material for the press that year, the whole period saw the metal create a solid price base from which it could rally two years later.
We worried about different things in the late 1990s – mainly the internet. The late 1990s witnessed the dot-com bubble, described by the US Federal Reserve Chairman at the time, Alan Greenspan, as “irrational exuberance”. Towards the end of the period, we were faced with a question that some believed could have serious negative implications for the market.
In 1999, we were instructed by management when completing due diligence on new clients and counterparties to find out if that company had created a Y2K policy (see Alchemist 17, October 1999). That was our main fear in those days. It feels like a lifetime ago now.
Johnson Matthey trading floor circa 1983.