Gaming the London Fix ... Seat Price

While goldbugs are focused on whether the London Fix is gamed, the industry is watching an equally interesting and delicate game around Deutsche Bank's London Fix Seat.

If you thought that the gold market was opaque, well a seat on the London Fix would have to be a totally dark market. This creates a problem for both buyer and seller as:

1. there are no public prices for a seat
2. neither seller or buyer want to be seen as too desperate by approaching the other party directly
3. the buyer doesn't know how profitable a seat could be, as Fix volumes are not published

Given the above, it is not unreasonable to expect the seller and potential buyers to play some of their signalling/negotiating game via the media. However, to be fair the "sources" mentioned in various media reports could also be legitimate bystanders just speculating, we just don't know. Either way, no need for that to spoil the fun of looking at the various comments made in the media (here and here and here) over the past few days to see how the London Fix Seat price game is playing out.

In favour of the seller

• the last time a seat was sold in 2004, it cost around 1 million pounds ($1.6 million) [anchoring high]
• Gold traders say the benchmark still has value, helping them to hedge risk [you make money being a fix member]
• a seat at the table is prestigious; to say that they're a fixing member carries a certain kudos [the seat carries a premium above the profit made as a market maker]
• there could be quite a few contenders; Deutsche said it had already begun talks with other banks to sell its role [lots of buyers]
• a logical possibility would be for another of the London Bullion Market Association's market-making members ... not currently involved in fixing - Credit Suisse, Goldman Sachs, JPMorgan, Merrill Lynch, Mitsui Precious Metals and UBS [lots of serious buyers]
• a candidate is more likely to emerge among the Asian banks ... as these look to raise their profile in the London market ... Bank of China and Industrial and Commercial Bank of China (ICBC) are already members of the LBMA. ICBC is also about to complete the acquisition of the London commodity arm of Standard Bank [even more buyers]
• bidders ... may also include other parties with an interest in the gold market such as refiners [a lot more buyers than you think, better rush]
• The bank said it would ... resign its seat if it fails to do so [but if I can't find a buyer I'll walk away, I'm not desperate]

In favour of the buyer

• Market participants said the role as a rate setter would be worth around £200,000 and had more value as a mark of status [anchoring low]
• it's a tough sale at the moment, there's nothing really in it for the banks [there's not that much money in market making]
• who, after the Libor scandal, will want it; increased scrutiny, with regulators pushing for new rules on commodity benchmarks after the Libor scandal, threatens to outweigh that benefit; if regulators are going to say 'well the fix doesn't work as it is, and we have to find another way of doing it', nobody is going to want to buy that seat [lots of regulatory risk]
• it is a very old-style, archaic system and it is amazing that such a way of doing business has survived the modern day and age [Fix is old school and will probably fade away so not worth that much in the future]
• any interested party ... would have to weigh the price carefully against shareholder value [I'm not desperate, won't overpay]

So we have a £200,000 to £1,000,000 price range with good points made on both sides. I think there is a good chance a Chinese bank will buy a seat for the prestige as it gives them the ability to differentiate themselves from their domestic competitors - Deutsche can be expect to work the status benefits point hard to new players in the bullion market or those looking to step up.

On the negative side, Deutsche Bank's biggest problem is the risk that regulators turn the fix from, as Paul Tustain says, a place where "financial trading principals [win] what traders call 'order-flow' from customers, principals (who sell gold to you)" where you can make money working your book, into a place where the holder of a Fix Seat is just an "agents (who buy gold for you)" and who can only earn the $0.20 per ounce Fix fee spread.