Tiny Startups Revamp Gold Market After Besting Big Exchanges
The job of reshaping the world’s most-important gold market has fallen to a pair of little-known startups chosen over industry titans including CME Group Inc., the London Metal Exchange and Intercontinental Exchange Inc.
Boat Services Ltd. and Autilla Inc. are tasked with increasing transparency and modernizing the way $5 trillion of bullion is traded annually in the London gold market. That’s no small feat. Until recently, the system for buying and selling was virtually unchanged for more than a century, with private transactions taking place among a loosely regulated group of banks and dealers.
The opaque system of over-the-counter gold trading is under increasing scrutiny from regulators pushing for tighter controls on commodities trading. With competing exchanges working on their own more-transparent systems, traders attending next week’s industry conference in Singapore are hungry for the London Bullion Market Association to disclose more details on how the new platform — set to start next year — will work.
“We will want to hear all about this in Singapore, who will report and, more importantly, what it will mean for the way we do business,” said Gerhard Schubert, founder of Schubert Commodities Consultancy DMCC in Dubai and a three-decade veteran of the precious metals industry. LBMA officials are scheduled to give a presentation at a panel on Monday.
Gold remains one of the world’s most-popular commodities, and demand from investors is up this year. Daily cleared trading was 18.8 million ounces in August, valued at about $25.2 billion, LBMA data show. Prices slipped 0.4 percent to $1,253.68 an ounce as of 12:04 p.m. in London.
Boat and Autilla, which employ fewer than 30 people and share office space at a technology hub in London, won the trade-reporting contract this week from the LBMA, which rejected proposals from big exchange owners CME, LME and ICE.
Boat, which is owned by Sweden’s Cinnober Financial Technology AB, a developer of trading platforms, will construct a data warehouse and trade repository. Autilla will create the new trading platform, which is optional for dealers to use. The companies were chosen because they offered the most flexible and customized option, said LBMA Chief Executive Ruth Crowell said.
David and Goliath
“We really were the David in this fight,” said Boat’s Chief Executive Officer Jamie Khurshid, 40, said in an interview. “We’re not a multi-billion dollar conglomerate and we’re not operating hundreds of different businesses.”
There’s skepticism the new group will be successful. Competition to London’s OTC system is coming from LMEprecious, which will introduce centrally-cleared gold contracts next year.
“People are going to trade on the LME,” said Adrien Biondi, the global head of precious metals at Commerzbank AG in Luxembourg. “Being on an exchange has several advantages, including reduced counterparty risk and regulatory compliance.”
The LBMA is counting on its membership to help make the new system work.
All trading members will be required to use Boat’s reporting system, or risk losing their their membership and related tax benefits, Crowell said. Using the trading platform will be optional, but all transactions on it will be reported directly to the Boat system.
Autilla’s Chief Executive Officer Mike Greenacre, 55, said his company’s gold platform will allow the three-year-old firm to double in size by next year.
“We see the scope to roll our model out to other commodity markets such as coal, iron ore and some of the niche energy products, where the market needs transparency and efficiency,” he said.