London Metal Exchange looks to plug the liquidity drain: Andy Home
By Andy Home
LONDON, Sept 9 (Reuters) -It says much about the London Metal Exchange that the focal point of its trading liquidity revolves around shipping times set in the late 19th century.
It took three months for Chilean copper and Malaysian tin to arrive in London when the LME was formally established in 1877. Modern ships can do the journey in a third of the time, but the LME's anchor price remains a rolling three-month contract.
The LME also retains one of the last surviving open outcry venues - its original red-seated ring - although it now co-exists with inter-office and electronic trading.
While other commodities exchanges have adopted a standardised monthly futures trading model, the LME remains at heart an arrivals market with a bewildering array of daily, weekly and monthly prompt dates.
This complex ecosystem serves to disperse liquidity across both dates and trading venues, but many of the LME's own members have played a part in fragmenting the marketplace.
The exchange has realised that if it is to remain a global metals trading hub in the 21st century, it needs to find a way to stop the liquidity drain.
FRAGMENTED LIQUIDITY
The core role of any exchange is "to centralise liquidity and provide the golden source for price information", to quote the LME's "White Paper on Enhancing Liquidity", released last week.
Yet only 48% of last year's traded volumes were transacted on the LMESelect electronic platform. This is a very low ratio by comparison with most other exchanges, which capture more than 95% of trades on a central electronic platform.
Moreover, while the rolling three-month date provides a liquidity point for electronic trading, that's not reflected in the distribution of open interest.
Around 75% of total open interest sits on the monthly third-Wednesday prompt dates even though only 2% of these trades are currently transacted through the central electronic system.
Quite evidently, a lot of trading activity is bypassing the LME's centralised dealing system to the detriment of price competition and transparency.
DARK POOLS
To some extent this has always been a problem.
The complexity of the LME's date structure requires the mediating skills of exchange members, whether it be to adjust a trade from the rolling three-month date to a monthly prompt or to structure an averaging trade for monthly price hedgers.
That's the essence of the inter-office section of the market.
LME members have always sought to offset such customer trades on their own trading books, meaning what's executed on exchange is a net fraction of the actual order flow.
What's changed in the last decade, however, is the proliferation of proprietary member trading systems. The traditional intermediary function has been industrialised.
The re-routing of liquidity from the exchange to the inter-office market has been compounded by the growing number of users opting for an over-the-counter trading relationship with LME members.
The European Market Infrastructure Regulation adopted in 2012 was intended to drive more OTC business onto exchanges. But it has backfired spectacularly when it comes to the LME.
The stricter rules on collateral have driven many smaller industrial users of the LME to OTC relationships with banks offering credit lines as part of the brokerage package.
Together with proprietary price-streaming platforms, the effect has been to create multiple dark pools of liquidity sitting close to, but not on, exchange.
The regulatory vulnerabilities created by this fragmentation were highlighted by the 2022 nickel crisis, when the LME lacked a clear understanding of positions that sprawled across both exchange and OTC platforms operated by multiple members.
BLOCK TRADE THRESHOLDS
The primary goal of the LME's package of proposals in the White Paper "is to increase liquidity in the central electronic venue which will ultimately improve the bid-offer spread and support better execution for end clients".
There are many components to the LME's liquidity booster plan, but the core is a proposal to introduce block trade thresholds.
Block trades are normally large-scale transactions negotiated outside of the electronic order book before being registered with the exchange.
Thresholds are already standard practice in other exchanges and block trades typically account for less than 5% of traded volumes in peer markets, the LME noted.
On the London exchange, by contrast, more than half of the exchange's volumes are conducted in the inter-office market, where there are no caps.
The LME is proposing a threshold of 10 lots for its core base metals contracts, excluding tin. Any trade below that size will be required to be executed electronically.
Daily prompts and cash date trading will be excluded in a nod to the exchange's industrial users seeking to lock in an average monthly price to match their physical pricing.
FEAR OF MISSING OUT
As ever with the LME, reform will be a slow process. The exchange is targeting the second half of next year to introduce any changes.
Members will likely fight a rearguard action, arguing over the devilish details.
But the LME is right to try to halt this growing fragmentation, if it wants to grab a share of the renewed investor interest in industrial metals such as aluminium, copper and nickel that are critical for decarbonisation.
CME Group CME.O has up to now reaped most of the rewards from the heightened investor appetite for all things metallic.
The U.S. exchange has successfully launched new contracts for battery metals lithium and cobalt, while also rolling out micro and weekly options products to enhance its benchmark copper contract.
The LME, by contrast, is currently too complex a trading landscape for many new investors. The fact that half of the exchange's trades are currently not visible on what is supposed to the central trading venue doesn't help.
If the LME is to retain its position as price setter for the world's metals trade, it's time to evolve from its 19th century business model.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by Jan Harvey
අදාළ වත්කම්
නවතම පුවත්
වියාචනය: XM Group සමාගම් ක්රියාත්මක කිරීම පමණක් වන සේවා සපයන අතර වෙබ් අඩවියේ හෝ වෙබ් අඩවිය හරහා ලබා ගත හැකි අන්තර්ගතය බැලීමට සහ/හෝ භාවිත කිරීමට පුද්ගලයෙකුට ඉඩ සලසමින් අපගේ මාර්ගගත වෙළඳ පහසුකම වෙත ප්රවේශය ලබා දෙන අතර වෙනස් කිරීමට හෝ පුළුල් කිරීමට අදහස් නොකරයි. එවැනි ප්රවේශය සහ භාවිතය සෑම විටම (i) නියමයන් සහ කොන්දේසි, (ii) අවදානම් අනතුරු ඇඟවීම් සහ (iii) සම්පූර්ණ වියාචනයට යටත් වේ. එබැවින් එවැනි අන්තර්ගතයක් සාමාන්ය තොරතුරුවලට වඩා වැඩි යමක් සපයා නොමැත. විශේෂයෙන්ම, අපගේ මාර්ගගත වෙළඳ පහසුකමේ අන්තර්ගතය පෙළඹවීමක් හෝ මූල්ය වෙළඳපොළවල කිසිදු ගනුදෙනුවක් සිදු කිරීමට ඉදිරිපත් කිරීමක් නොවන බව කරුණාවෙන් සලකන්න. ඕනෑම මූල්ය වෙළඳපොළක වෙළඳාම් කිරීම ඔබේ ප්රාග්ධනයට සැලකිය යුතු අවදානමක් එක් කරයි.
අපගේ මාර්ගගත වෙළඳ පහසුකමේ ප්රකාශිත සියලු කරුණු අධ්යාපනික/තොරතුරුමය අරමුණු සඳහා පමණක් අදහස් කෙරෙන අතර මූල්ය, ආයෝජන බදු හෝ වෙළඳ උපදෙස් සහ නිර්දේශයන්; හෝ අපගේ වෙළඳ මිල පිළිබඳ වාර්තාවක්; හෝ ඕනෑම මූල්ය උපකරණයක ඉදිරිපත් කිරීමක් හෝ ඒ සඳහා පෙළඹවීමක්; හෝ විශේෂ ඉල්ලීමකින් තොරව ඔබ වෙත ලබා දෙන ලද මූල්ය ප්රවර්ධනයන් ලෙස නොසැලකිය යුතුය.
ඕනෑම තෙවන පාර්ශවීය අන්තර්ගතයක් මෙන්ම XM විසින් සකසන ලද අන්තර්ගතය එනම් අදහස්, පුවත්, පර්යේෂණ, විශ්ලේෂණ, මිල ගණන් සහ වෙනත් තොරතුරු හෝ මෙම වෙබ් අඩවියේ අන්තර්ගත තෙවන පාර්ශවීය වෙබ් අඩවි සඳහා සබැඳි සාමාන්ය වෙළඳපොළ විවරණයක් ලෙස "පවතින පරිදි" සපයා ඇති අතර එහි ආයෝජන උපදෙස් ඇතුළත් නොවේ. ඕනෑම අන්තර්ගතයක් ආයෝජන පර්යේෂණයක් ලෙස අර්ථ දක්වා ඇති ප්රමාණයට, ආයෝජන පර්යේෂණයේ ස්වාධීනත්වය ප්රවර්ධනය කිරීමට නිර්මාණය කර ඇති නෛතික අවශ්යතාවලට අනුකූලව අන්තර්ගතය සකසා නොමැති බවත් එලෙස අරමුණු කර නොමැති බවත් ඔබ සලකා පිළිගත යුතු අතර එබැවින් එය අදාළ නීති සහ රෙගුලාසි යටතේ අලෙවිකරණ සන්නිවේදනයක් ලෙස සලකනු ලැබේ. ඉහත සඳහන් තොරතුරු සලකා මෙතනින් ප්රවේශ විය හැකි, ස්වාධීන නොවන ආයෝජන පර්යේෂණ සහ අවදානම් අනතුරු ඇඟවීම පිළිබඳ අපගේ දැනුම්දීම ඔබ කියවා තේරුම් ගෙන ඇති බව සහතික කර ගන්න.
