Showing posts with label Derivatives. Show all posts
Showing posts with label Derivatives. Show all posts

Thursday, 21 April 2011

Fun things to do in London’s Financial heartland No.1: Going on Exchange

Last week I took a London-based NGO to the London Metal Exchange. We’re kind of concerned about some issues around commodity speculation, so thought it would be worth a visit. To be fair, I sometimes go with my friend Harry just for fun, because it’s such a darn unique curiosity. If you ever want to do it, go to the LME website, fill in the booking form and send it to them.

Why would you want to go there? Because it’s the largest global exchange in industrial metals, and that makes it an interesting node in the matrix of global trade. It mostly deals with metal derivatives (futures and options contracts for future delivery of metal), but trade in physical metals for immediate delivery also occurs. I spoke to a trader outside when he was having a smoke, and he said that if you deal in the physical ‘spot’ contracts, you’ll have metal waiting for you in a warehouse within two days.

The real choice is what metal you want. There’s no useless precious metal here, it’s all useful base metals, the physical underpinnings of global industrialisation and urbanisation. Most important is copper, used in electronics and construction. Its price is a key proxy for world economic growth, especially of developing countries. Chilean mines are the largest suppliers, and Chinese companies are the largest consumers. We churn through some 50 000 tonnes of this stuff each day.

Second up is aluminum, used for cars and construction and tin foil. Then there’s zinc, mostly used for galvanising steel for the auto and construction industries. Nickel gets used in the creation of stainless steel, and batteries for hybrid cars. Normal car batteries get made out of lead, half of which is mined in China. Rechargeable batteries for mobile phones get made with cobalt, mostly produced in the Democratic Republic of the Congo, but then shipped to China. Other metals include tin, dominated by only four producing countries – China, Indonesia, Peru and Malaysia – and molybdenum, a rare earth used in steel alloys.

Every metal on the exchange is pretty much dominated by China in terms of global consumption, and, frequently, production. It thus seems something of a historical anachronism that the exchange is in London rather than Shanghai. Then again, it’s an open question about how much of the LME trade is actually related to physical metals for real-world use, and how much is purely related to the speculative activities of London-based investors.

So let’s say a hedge fund decides that things in the DRC aren’t looking favourable. They phone their local broker at the office, and request to purchase 100 cobalt futures. The broker at the office phones his floor broker on the exchange, who gives the order to the clerk. The clerk gives the order to a guy sitting on a plush red leather couch in the ring. This is the ring dealer. The ring dealer casually shouts that they want to buy 100 cobalt futures. Some other ring dealer, carrying a different order, casually agrees to sell. Deal done. The clerk relays the info back, and the phone rings at the hedge fund office, telling them that the trade is done. They now own 100 tonnes of cobalt, in a roundabout way, through the derivative.

And this kind of thing goes on all day, and the prices set in the process become the ‘official’ price of cobalt around the world, used as a benchmark for producers and users to set their own prices.

For the most excitement, you probably want to go for the ‘kerb trading’ sessions, the afternoon free-for-all where they shout at each other. The earlier sessions are kind of boring and the ring dealers just sit around and don’t seem that interested in setting the global price of metal. Keep a look out while you’re there for moments of intrigue: See if you can spot JP Morgan trying to corner the copper market.

Thursday, 7 April 2011


In 2008 I embarked on an unusual experiment in gonzo urban anthropology. I left the world of radical left-wing academia, and went to London with two goals in mind. Goal one: To break into the financial sector at the heart of one of the most powerful centres of the global economy and to see first-hand how it worked, to learn by doing, not by reading. Goal two: To shatter the complacent intellectual comfort zone I’d found myself in, and to learn to move in and out of different worlds like a chameleon. It was an exercise in critical thought, backed by real action.

That’s how I found myself on the 36th floor of the Lehman Brothers offices in Canary Wharf, four weeks before the company collapsed, and how I found myself in the subsequent financial crisis, trying to pitch esoteric inflation derivatives, property derivatives, and longevity derivatives, aboard a mad raft with an oddball crew of old rogues and young rats, fighting against the odds to stay afloat. It’s a pretty interesting story, and I hope to tell it some time.

In the mean time, I’m completely broke, in a room in Brixton, with a pile of business cards and a stack of ideas, most of which don’t add up. Sometimes I help unusual people to get to grips with conceptually challenging things, like what the financial system might be. I look at how financial concepts might be channeled creatively, through the fledgling world of social and environmental finance, and consider why all this might matter in issues of social and environmental justice.

Sometimes I look at bizarre curiosities, like new currencies and new units of time, Islamic finance, Hawala systems and financial crime. I delve into the way the financial sector tries to reconcile our views of the future in the present.

Sometimes I hang out with people who call themselves anarchists, but who are mostly just concerned about a world they perceive as offering them nothing but bland complacency and treadmill materialism. They hack conventions and set up bases in old abandoned buildings, but are still daunted by the seemingly intractable, impenetrable and arcane financial structures around them. I urge them to try engage more, to spend less time throwing rocks at things, and more time subverting their own preconceptions. They look at me weirdly, but I think there’s a lot to be said for a new activist philosophy.

I play a lot of guitar. I once busked on the New York Underground. I have a pricing model on my hardrive that can tell you what rate to charge for a bet on how long people live for. I lifted it from an investment bank, and one day, when I learn to use it, I'm going to create a rock 'n roll financial opera.

I once went to a fancy university, got an MPhil in Development Studies, wrote some papers. Sometimes I hang out with development people and talk trade policy, agricultural subsidies, and NGOs. Other times I hang out with finance peeps, and talk about things like sugar and carbon.