What Is Ring Trading?
Ring trading is the method by which certain types of investment business is conducted at the London Metal Exchange (LME), where trading activity occurs in five-minute intervals known as "rings" within a six-meter diameter circle (a particular type of trading pit) with two large display boards that show current prices. Each of the ring-dealing members has a fixed seat within the ring, behind which an assistant is permitted to stand to pass orders to the ring dealing member and to liaise with customers regarding market conditions.
Ring trading, more broadly, may also refer to any type of trading pit.
- Ring trading is the method by which certain types of investment business are conducted at the London Metal Exchange.
- Here, trading activity occurs in five-minute intervals within a six-meter diameter circular ring with two large display boards that show current prices.
- Ring trading may also denote more generally the practice of open outcry floor trading that occurs in trading pits.
How Ring Trading Works
On the London Metals Exchange, trading activity takes place in designated five-minute-long periods known as "rings" during which traders and floor brokers engage in open outcry trading taking place in a six-meter ring-shaped trading pit.
Ring sessions are divided by trading instruments; for instance, steel trading takes place during the first session from 11:40 am-11:45 am (local time) and 1:10 pm-1:15 pm; and it ceases trading at 4:20 pm. Ring trading at the LME occurs between 11:40 am and 5:00 pm, with inter-office telephone trading available 24 hours a day.
Each of the ring dealing members has a fixed seat within the ring, behind which an assistant is permitted to stand to pass orders to the ring dealing member and to liaise with customers regarding market conditions.
Rings as Floor Trading Pits
More generally, a ring is a location on the floor of an exchange where trades are executed, more commonly referred to as a trading pit. The circular or hexagonal arrangement (hence, ring) where traders can transact with a counterparty is also referred to as a pit, which is the preferred name for commodities markets.
For open-outcry trading floors and methods, the trading ring plays an essential role in facilitating the process of price discovery. Price discovery is the overall process, whether explicit or inferred, where the spot price of an asset or service is established. Done right, it sets the fair price of a security, commodity, or currency based by using a variety of factors, principally the levels of supply and demand.
However, for most modern financial markets, open-outcry as a system of price discovery has been replaced by electronic methods organized through computerized exchanges and matching systems. Rings, pits, and the colorful characters populating trading venues of yore remain a nostalgic tradition in many financial markets.