The crux of the problem with the monthly outright futures is that they do not offer sufficient liquidity on the screen. For example, a client wishing to buy/ sell 500 lots of March outright Aluminium will not be able to execute this order via the screen without moving the price significantly – and this is on the premise that there are bids/offers resting in the order book. So where does this leave the LME? The last 18 months have been filled with friction and frustration between LME member firms and the Exchange managers. The members have continually voiced their concerns that there is a lack of understanding and consideration of their attributes. The Exchange, according to the members, has not appreciated the efforts and the liquidity that the member firms bring to the market. It is on this very relationship that the future of the LME hinges in determining its success or failure in the future.
However, recently it appears the Exchange is turning a corner. The LME has started to pay more attention to the select group of category 1 and category 2 members who are well-placed to service the high volume adjustment crowd and it is paying dividends. Whilst much of the larger volume client-driven trading has gone OTC, many funds are unable to offer such look-a-like contracts in their mandates to their investors. The systemic risks of OTC contracts need no explanation here but what is bordering on ‘regulation dodging’ is the overuse of the over- the-counter market. Under current regulations all derivative trading must be done on an exchange unless there is no like-for-like contract available. However there are in fact contracts available on exchange for these larger volumes and odd-dated spreads –and it is imperative that this is now acknowledged.
So far in 2017 it seems that the LME’s hard work to coerce high volume trading back to the Exchange is coming to fruition. Whilst January has undoubtedly been tranquil – Chinese New Year has brought about a drought of 3-month volumes – the first three weeks were highly active. The majority of action came from North America and Europe as China appeared to stand still. The Trump vote in the US is filtering into the markets and as Mr T himself administers his manifesto of public spending and construction, the ‘Trump Trade’ in metals is clearly evident. Copper and Aluminium have been subject to strong buying (both up around 6-8%) this year and the trend doesn’t look like ending any time soon. The apparent value in the LME contracts also gains support from a Dollar that continues to come under pressure from Trump’s unstoppable desire to sign extraordinary executive orders.
So what will come of the London Metal Exchange in 2017? There is no doubt that the global arena will undergo significant change this year. This change will come from the ‘outliers’ that previously had no significance. They will call into question the identity of capitalism and the identity of the LME. The Exchange will have to ask itself what it wants. It will have to review its audience and understand their requirements. Is it more advantageous to shun the brokers in the hope of attracting more liquidity from clients, or should it return to its roots and work alongside the brokers to build the Exchange back up again? These are questions that must be asked and must be answered now otherwise the next ‘outlier’ could be the closure of the LME.
Edward Fremlin-Key E:
edward.fremlin-key@
admisi.com T: +44(0) 20 7716 8084
7 | ADMISI - The Ghost In The Machine | January/February 2017
THERE IS NO DOUBT THAT THE GLOBAL ARENA WILL UNDERGO SIGNIFICANT CHANGE THIS YEAR. THIS CHANGE WILL COME FROM THE ‘OUTLIERS’ THAT
PREVIOUSLY HAD NO
SIGNIFICANCE.
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