The London Metal Exchange may introduce market-makers to boost liquidity in new contracts in the future, including for non-metals products it might eventually launch.

The exchange's ceo Garry Jones told Metal Bulletin in an interview that new LME contracts or tweaks to old ones would be helped along by having market participants prepared to take proprietary risks.

"You have got to have proper traders who will take the other side of the trade, and you should encourage proprietary risk-taking in the market. If you're going into new areas, you need people to make markets," he said.

"It's more for new products, but of course if we expand our options portfolio of products, which we are clearly looking to do, then most successful markets on exchange options have market-makers who make markets in volatility and then delta hedge the underlying on the core markets. So you have got to create the incentive for them to do that," he added.

Jones said physical premium contracts are another good example of an instance when market-makers could be needed.

The LME has said it will consider physical contracts but many questions remain, including whether the new products would be traded in the ring or electronically.

"We have started talking to people about physical spread contracts and the question there is, should it be electronic or in the ring? Can we think of new business to put into the ring?" Jones added.

Earlier this week, Jones said the LME will eventually launch contracts in non-metals products, and that the "M in LME will not stand for Metals"

"Once LME Clear has regulatory approval and goes live, we'll have some of the best technology for clearing - as an exchange business with that infrastructure in place, plus we have connectivity from all the major firms already, why shouldn't we look at other things, it doesn't have to be just metals," he told Metal Bulletin.

"Phase one is taking a critical look at the market as it exists now, and deciding what is failing and what is succeeding, whether we can improve the ones that are succeeding, should we weave out the ones that are not? We'll see whether there should there be new versions of contracts, like steel and NASAAC," he said.

A second phase expansion will include adding more options and premium contracts, and a third and fourth phase would include looking at other commodities. Jones said the latter would probably require market makers and a new business model.

"Realistically, the strength of the exchange is in commodities and we have people looking at lots of alternatives. We should bottom out the metals complex first because that's what we are good at - we have a high critical mass and we know all the clients, it'd be crazy not to offer better services and linkages from there," Jones added.

See also: Open outcry trading crucial for LME - Jones

Andrea Hotter
ahotter@metalbulletin.com
Twitter: @andreahotter