THE London Metal Exchange (LME) is planning measures to boost electronic trading in its monthly contracts, a move that may reduce activity in its unique three-month rolling contracts that serve as a benchmark for the global metals industry.
The measures – including a requirement for dealers to place small trades in monthly contracts electronically – may lead to those contracts becoming the “key liquidity point” for users, just like they are on rival exchanges, the LME said in a notice to members on Wednesday (Sep 4).
Since it was founded in the 19th century, the LME’s benchmark contracts have been for delivery in three months’ time – which at the time was the approximate shipping time for Malaysian tin and Chilean copper to the UK. That historical quirk has set it apart from rival exchanges such as CME Group and the Shanghai Futures Exchange, which concentrate liquidity in monthly contracts, and has irritated some users.
“We have not done a good job of giving people a choice: they have been forced to use that three-month contract to go into and out of positions because we haven’t offered an alternative,” LME chief executive Matthew Chamberlain said. While the exchange would not “switch off” the three-month contract, he said the new measures would “let the market decide where they want to trade.”
Under the plan to introduce a “block limit”, trades of 10 lots or below on certain monthly dates would be required to be executed on the LME’s electronic system.
The LME said that the new measures could spur a shift away from its phone-based market, which currently serves as a key venue for dealers looking to execute large or complex trades. A large volume of LME trading takes place via phone and e-mail in this so-called interoffice market. Screen-based trading accounted for 48 per cent of overall volumes in 2023, while rivals often see more than 95 per cent of trading taking place electronically, the LME said.
Collectively, the plans represent a major step in the LME’s efforts to modernise its market, which have been intensifying in the wake of the nickel crisis in 2022. Previous measures to make its electronic market more attractive have proven controversial, and the LME recognised that they could pose a threat to existing dealers’ business models. But it also said they support the LME’s “core regulatory requirements to maintain fair, orderly and efficient markets”.
For years, the LME has been exploring measures to boost liquidity on its electronic platform, spurred on by algorithmic market makers who dominate trading on other exchanges. But it has faced criticism from some core users, who say that may jeopardise trading in its unique suite of daily forward contracts, which have underpinned the LME’s status as the global pricing benchmark for more than a century.
Chamberlain said that the exchange was “very committed to the physical market”, stressing that the new measures did not involve any change to the LME’s daily date structure. BLOOMBERG
