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London Metal Exchange

Coordinates: 51°31′16″N 0°5′15″W / 51.52111°N 0.08750°W / 51.52111; -0.08750
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London Metal Exchange
Formation1877; 147 years ago (1877)
PurposeTrading in metals and metals-related contracts
OwnerHong Kong Exchanges and Clearing

The London Metal Exchange (LME) is a futures and forwards exchange with the world's largest market in standarised forward contracts, futures contracts and options on base metals. The exchange also offers contracts on ferrous metals and precious metals. As the LME offers contracts with daily expiry dates of up to three months from trade date, weekly contracts to six months, and monthly contracts up to 123 months,[1] it also allows for cash trading. It offers hedging, worldwide reference pricing, and the option of physical delivery to settle contracts.

History

The London Metal Market and Exchange Company was founded in 1877, but the market traces its origins back to 1571 and the opening of the Royal Exchange, London. Before the exchange was created, business was conducted by traders in London coffee houses using a makeshift ring drawn in chalk on the floor.[2]

At first only copper was traded. Lead and zinc were soon added but only gained official trading status in 1920. The exchange was closed upon the outbreak of World War II and did not re-open for copper trading until 1953. The range of metals traded was extended to include aluminium (1978), nickel (1979), tin (1989), aluminium alloy (1992), steel (2008), and minor metals cobalt and molybdenum (2010). The exchange ceased trading plastics in 2011. The total value of the trade is around $US 11.6 trillion annually.[3]

Many deals are made for commodities to be delivered in three months' time. The custom stems from the time that copper cargoes originally took in 1877 on their voyage from the ports of Chile.[2]

The LME was owned by its members until 2012, when it was sold to Hong Kong Exchanges and Clearing for £1.4 billion.[4]

During the 2022 Russian invasion of Ukraine, worries about sanctions on Russian nickel exports triggered a short squeeze on the LME, causing the price of nickel to quadruple in just two days, reaching US$100,000 per tonne.[5][6][7][8] Controversially, the LME responded by canceling US$3.9 billion of trades, and suspended trading for multiple days.[9][10]

Commodities traded

The LME offers futures and options contracts for aluminium, aluminium alloy, NASAAC (North American Special Aluminium Alloy), cobalt, copper, lead, lithium, molybdenum, nickel, steel HRC, steel rebar, steel scrap, tin and zinc.

Facilities

Main entrance to the former premises of the LME, at 56 Leadenhall Street in the City of London

To trade contracts in copper, tin, or any other metal listed on the LME, one has to trade through an LME member. Purchasers of contracts, which are then left to reach maturity, will receive a warrant for a specific LME approved warehouse to take delivery of the metal if required.

The LME issues, each day, detailed figures on how many tonnes of each metal is in its warehouses, which helps producers and consumers make correct business decisions.

Ring trading

Trading Times are 11:40 to 17:00 GMT.

Open-outcry is the oldest way of trading on the exchange, though nowadays the majority of trades are placed electronically.[11] It is central to the process of price discovery, the way LME official prices are established. Prices are derived from the most liquid periods of trading; the short open-outcry ring trading sessions, and are most representative of industry supply and demand. The official settlement price, on which contracts are settled, is determined by the last offer price before the bell is sounded to mark the end of the official ring.

There is constant inter-office trading. A relatively small yet important portion of trading is still done by open-outcry in the Ring. There is a morning and an afternoon trade, where each of the nine metal contracts are traded in two blocks with a five-minute session for each contract (the sessions last from 11.40 until 13.10 and from 14.55 until 16.15, each session includes a 10-minute break). The second trading block in the morning is key to setting the Daily Official Exchange rates. After the official trades of sessions one and two, there are 85 and 45 minutes of "kerb" trading respectively. Trades are in futures, options and TAPOs (traded average-price options, a form of Asian options).

Whilst the price discovery mechanism used by the exchange is post-trade transparent it is not pre-trade transparent. Pre-trade transparency is required for many securities under the Market in Financial Instruments Directive (MiFiD) to achieve fair markets by reducing such illegal abuse as market manipulation.

The LME is the last exchange in Europe where open-outcry trading takes place.[2] The ring was temporarily closed in March 2020 due to the COVID-19 pandemic.[12] In January 2021, LME proposed closing the ring, Europe’s last open-outcry trading floor, and moving permanently to an electronic system.[13][14]

Ring Dealing Members

Ring Dealing Members are entitled to trade in the Ring during the ring-trading sessions.[15] They may also operate a 24-hour market by trading inter-office. All Ring Dealing Members, as members of the LME Clear, are authorised under the Financial Services and Markets Act 2000, and are regulated by the Financial Conduct Authority.

Ring Dealing Members are Clearing Members, who hold the exclusive right to trade in the ring.[16]

In addition to the 9 companies that have exclusive rights to trade in the Ring, around 100 companies are involved in the LME in total.

Precious metals

Contrary to popular belief, the precious metals, gold and silver, are not traded on the London Metal Exchange, but on the over-the-counter market usually referred to as the London Bullion Market, by the members of the London Bullion Market Association. Platinum and palladium are traded on the London Platinum and Palladium Market. Both members of the LBMA and LPPM trade the precious metals spot market on EBS (Electronic Broking Systems)—acquired by ICAP in June 2006. Many companies involved in minor metals are members of the Minor Metal Trade Association.

The LME used,[17] however, to provide trade matching and clearing services to the London bullion market and distributes gold, silver, and gold IRS (interest rate swaps) forward rates on behalf of the LBMA.

Electronic trading

The LME launched an electronic platform called LME Select launched in February 2001.[11] This was developed by a Swedish software house Cinnober. The platform is a FIX-based trading platform, and now handles a majority of the total LME business.

Delivery points

As a market of “last resort”, industry can use the LME’s delivery option to sell excess stock in times of oversupply and as a source of material in times of extreme shortage. In reality, physical delivery occurs in a very small percentage of cases on the LME as most organizations use the LME for hedging purposes. The small percentage which does result in delivery, however, plays a vital role in creating price convergence.

Warehouses

To support the physical delivery mechanism, the LME approves and licenses a network of warehouses and storage facilities around the world. Controversy arose in 2013 because the LME took action to limit the use of its warehouses for the hoarding of aluminium. In March 2014, England's High Court found for Rusal, the Russian aluminium company, striking down these rules.

See also

References

  1. ^ "Forward & Futures Contract Specifications". London Metal Exchange. Retrieved 7 August 2015.
  2. ^ a b c BBC Radio 4 Today, broadcast 25 October 2011.
  3. ^ "LME achieves another year of record volume". London Metal Exchange. 5 January 2009. Archived from the original on 1 April 2009. Retrieved 29 July 2009.
  4. ^ Sanderson, Henry (24 March 2017). "London Metal Exchange debates its future". Financial Times. Retrieved 8 June 2017.
  5. ^ Hume, Neil; Lockett, Hudson (8 March 2022). "LME introduces emergency measures as nickel hits $100,000 a tonne". Financial Times. Retrieved 8 March 2022.
  6. ^ Burton, Mark; Farchy, Jack; Cang, Alfred. "LME Halts Nickel Trading After Unprecedented 250% Spike". Bloomberg News. Retrieved 8 March 2022.
  7. ^ "Russian worries suggest US sanctions are biting". Emerald Expert Briefings. 10 August 2018. doi:10.1108/oxan-es236743. ISSN 2633-304X.
  8. ^ Shabalala, Zandi (8 March 2022). "Nickel booms on short squeeze while other metals retreat". Reuters. Retrieved 10 March 2022.
  9. ^ "London Metal Exchange extends nickel freeze after scrapping $3.9bn worth of trades". CityAM. 11 March 2022. Retrieved 15 March 2022.
  10. ^ Wallace, Joe (15 March 2022). "London Nickel Trading to Restart Wednesday, With Caps on Price Moves". Wall Street Journal. Retrieved 15 March 2022.
  11. ^ a b "LME Select". London Metal Exchange.{{cite web}}: CS1 maint: url-status (link)
  12. ^ Agini, Samuel (17 March 2020). "LME to shut down Ring trading after member tests positive for Covid-19". Financial News. Retrieved 5 March 2021.
  13. ^ Burton, Mark; Jack, Farchy (19 January 2021). "London's Raucous Trading Ring Calls Time on 144-Year History". Bloomberg News. Retrieved 5 March 2021.
  14. ^ Desai, Pratima (19 January 2021). "End of an era? London Metal Exchange proposes closure of open-outcry trade". Reuters. Retrieved 5 March 2021.
  15. ^ "Category 1 – Ring Dealing". London Metal Exchange. Archived from the original on 22 March 2009. Retrieved 29 July 2009.
  16. ^ "Ring Dealing Members". London Metal Exchange. Retrieved 7 August 2015.
  17. ^ "Archived copy" (PDF). Archived from the original (PDF) on 26 March 2015. Retrieved 31 March 2015.{{cite web}}: CS1 maint: archived copy as title (link)

51°31′16″N 0°5′15″W / 51.52111°N 0.08750°W / 51.52111; -0.08750

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