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Crunch time for increasingly brittle London Metal Exchange
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Loading...London Metal Exchange is facing a major decision in the 140-year history - whether to become a modern market futures and to attract more of the world's hedge funds and investors.
Now top members of the LME consider reforming the basic architecture after two years of decline in volumes and increased competition from exchanges in the US and China.
Malcolm Freeman, director of Kingdom Futures, says that the volumes on the LME fell by 6% in January, which he called "wake-up call" in an attempt to "ensure the long-term future of the stock exchange."
For reformers, not doing anything means continuing decline in volumes and e-commerce to move elsewhere. But others say that changing risks threaten the very structure of the market, which makes the LME unique.
Bought by Hong Kong Exchange and Clearing in 2012 for 1.4 billion pounds, LME is different to all other commodity markets. When a customer places a purchase order by phone or computer, it will get a contract to supply metal three months from the date of the transaction based on the time required for delivery of copper from Chile to London.
For oil and gold it is different, as buyers can buy and sell the same month contract that requires delivery of the same date each month.
The use of individual daily delivery dates on the LME is intended for users of the physical metals, that wish to hedge the date of delivery or sale of metal.
Thus it is not easily to attract hedge funds or other financial investors to metal trading due to the difficulty of finding a willing buyer for a contract with such a specific delivery date. Historically, LME brokers, well versed in the intricacies of the exchange, have been able to handle those transactions in return for additional fees. But funds would largely prefer just to buy and sell a contract at the touch of a button.
To meet the demand in recent years, banks such as JPMorgan and Goldman Sachs were offered the most liquid month contracts on the LME for their clients through their own electronic platforms, taking the risk to adjust the positions of the exchange. Due to their large number of clients they can cover this risk as receive opposite positions on the platform.
Reformers say the LME should keep daily three-month contracts for natural users, whose supply and demand are the basis of the market price. But the monthly electronic contract allows the funds to be collected easily.
While there might be an initial drop off in the exchange users, in longer term it could go on to attract greater volumes, reformers say.
As a first step, LME is going to launch a standard monthly futures contracts on gold in the nearest future, and will be seen as a barometer of whether the change will be accepted by the market.
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