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 within a six-meter diameter circle with two large display boards that show current prices. Each of the ring dealing members have 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.
BREAKING DOWN Ring Trading
Trading activity takes place in designated five-minute long periods known as "rings." Ring sessions are divided by trading instrument; for instance, steel trading takes place during the first session from 11:40 am-11:45 am (local time) and 1:05 pm-1:10 pm; and during the second session at 3:30 pm-13:35 pm. Ring trading at the LME occurs between 11:40 am, and 5:00 pm; inter-office telephone trading is available 24 hours a day.
More generally, a ring is a location on the floor of an exchange where trades are executed. The circular arrangement (hence, ring) where trades 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 However, for most modern financial markets, open-outcry as a system of price discovery has been replaced by electronic methods. Rings, pits and the colorful characters populating trading venues remains a nostalgic tradition at many financial marketplaces.