London Spot Fix
What it is:
The London Spot Fix occurs when the members of the London Gold Pool (five banks) have a conferenceand set the price per ounce for several metals (gold, platinum, silver and palladium).
How it works/Example:
To perform a fix, the members essentially determine where supply meets demand for all of the buy and sell orders that the banks have on hand.
The process occurs twice a day (10:30 a.m. and 3 p.m. London time) via conference and generally begins with the chairman declaring a price very near the spot market price. The participating banks then declare the net amount of metal they would buy or sell at the proposed price based on the orders they have on hand. The chairman then adjusts the price up or down and the participating banks again indicate the net orders they could fill in order to find the price that balances the buyers and sellers.
It is important to that many of the banks’ orders are limit orders, meaning that the buyer or seller has indicated that he or she is willing to buy or sell at any price above or below a certain limit. Thus, as the chairman raises or lowers the price, more orders may drop out of or come into the pool, which increases or decreases supply or demand.
When the price finally comes into balance, the banks execute the large pool of orders at a common price. This means that customers often have to wait until the fix occurs in order to find out how their trades executed. The bank participants earn a small fee on the fix.
Why it matters:
The London spot fix is a major part of the trading day in the commodities world, because it essentially sets the price of gold bullion and thus all other gold-related products (including derivatives), for example. However, it does not set the price of a metal for the whole day. In fact, the fix is simply the price agreed to at that point in time; within minutes, the price fluctuate again.
It is important to that the fix is dominated by a few large banks that trade on behalf of their customers or directly with their customers (as principals). Because the banks can become buyers or sellers themselves, the banks have a considerable influence on the price at which they are willing to buy and sell.