How Metal Bulletin prices illiquid markets: minors and alloys – web seminar Q&A

Here are the answers to key questions raised during Metal Bulletin’s recent web seminar, covering price discovery in illiquid spot markets.

Regarding Metal Bulletin’s methodology, you have indicated that you are aligning yourselves with the IOSCO principles for price reporting and that your price discovery process is auditable. Is it actually audited by an external body?
We have very recently gone through Type 1 of the IOSCO audit process for two of our prices used in exchange contracts (which are Aluminium P1020A-in warehouse Rotterdam duty-unpaid $/tonne and Iron Ore 62% index). Our assurance will be issued by external auditors imminently. We take the same approach and apply the same standards across all of our prices, ensuring we comply with our published procedures. All price discovery is recorded in our in-house electronic database, MInD (Metals Information Database), which is fully auditable.

What do you do if you only have data submissions from one, or very few parties? Can you still move the price?
Should a significant proportion of the data (defined as more than 50% of the data points) be provided by a single source, the reporter, peer reviewer and the senior editorial person signing off the price prior to publication will analyse the data and consider whether to publish an assessment based on the data collected or roll it over from the previous session.

Will you necessarily move a price because another related, and possibly more liquid price, has moved?
We look for spot activity relating to each individual price that we assess – firstly in the form of concluded transactions, but secondly by way of bids and offers. We understand that a raw materials market can have different fundamentals to a downstream market, for example, and know that part of the value of our price assessments stands in their ability to capture these differences. This said, we do understand that related markets can move in tandem with one another, and where one of those markets is less liquid, we will be looking to see whether a move is justified through use of market participants’ assessments of a price.

Will you always move a price if business has been concluded outside of the range?
Trades need to be considered “repeatable”, and bids, offers and assessments need to be reflective of the spot market during the given timeframe (at a level where spot business could have been concluded). As a result, some data points may be excluded from the price assessment as outliers. The conversations price reporters have with data contributors as part of the price discovery process (in addition to the submission of data) are important in informing whether this is the case.

Business also needs to meet the specifications set out in Metal Bulletin’s pricing methodology: this includes chemical specifications, delivery terms, minimum tonnages and payment terms, as well as other requirements. Price reporters will endeavour to normalise business that does not entirely meet the detailed specifications, but the price of material that is traded in a different location, or with a different specification, may not be reflected in the price published by Metal Bulletin.

Metal Bulletin’s in-house database, MInD, gives price reporters the facility to exclude a data point as an outlier or as unrepresentative. When discarding a data point in MInD, a reporter will be asked to provide a mandatory rationale in accordance with our stringent policies.

By moving a published price when there is no liquidity, do you think you give the impression that there is an active spot market, when there is not?
During the price discovery process the price reporters’ goal is to discover at what representative level market participants have concluded business, made offers or received bids over a defined trading period. The published prices in themselves do not give an indication of liquidity relative to previous weeks, but can be used alongside trade logs and market reports, which provide more colour on trading activity.

How does Metal Bulletin steer clear of leading a market (as opposed to reflecting the market) when it assesses illiquid prices?
Non-transaction data, such as bids and offers, are more likely to inform a price assessment where illiquid markets are concerned but a price reporters’ conversations with active market participants will be essential in informing whether or not this data is enough to warrant a price move. Low offers or high bids are likely to be given more weighting than low bids or a high offers, for example.

Metal Bulletin is independent of the market and has no interest in moving the price in one way or another. The price assessments reflect the spot market in a given week, rather than where prices are likely to head, or where they “should be” based on market fundamentals.

What is the minimum number of transactions required to justify the continued publication of a price on Metal Bulletin?
As commodity markets differ in liquidity levels at different periods, Metal Bulletin’s methodology does not set any minimum number, or threshold, of transactions to be gathered on which to base the assessment. However, the editorial team will make a decision as to whether the available data set for a given price is sufficient to support and change in the price.

What is the criteria to discontinue a price assessment?
In some cases, a market will become so illiquid that Metal Bulletin considers discontinuing its price assessment, but this is not a decision that is taken lightly. In these cases, Metal Bulletin will open a consultation with the market to ascertain whether a price should be discontinued; a consultation notice will be published on our website and we will endeavour to get feedback from anybody who would be affected by the discontinuation.

Price reporters will consider other measures as an alternative to discontinuing a price, such as reducing frequency of publication or altering the specification to include more business.

How do you decide who is eligible to contribute data to your price assessments?
Producers, consumers and traders active in the buying and/or selling of the metal in question are invited to contribute to Metal Bulletin’s pricing.

All data sources are subject to review before being able to submit price data. The aim is to make sure that submitters have sufficient visibility and understanding of the market to be able to provide reliable price data. When reporters establish contact with a new market participant, the prospective data contributor is asked to provide a number of details, including the company’s typical spot volumes and any links to other parties in the market.

This information is not for publication and is held confidentially in MInD, but is designed to provide a reporter with a picture of the source’s position within the market. The new contributor does not automatically become an approved data submitter, but their contributions will be reviewed over a number of price discovery sessions to establish whether they are a reliable source.

Metal Bulletin’s data submitter policy provides guidelines defining the high level of data quality and integrity that Metal Bulletin expects from contributing organisation providing pricing data.

Does Metal Bulletin speak to analysts for price discovery?
Our journalists may engage with market analysts from an editorial perspective, but their opinions will not feed into price discovery since analysts are observers, and not active in the spot buying and selling of metals.

What is your process for determining if data contributors are trying to manipulate a market? What, therefore, is the process for excluding a source of information?
Reporters can look back at the prices a data submitter has been contributing data over a period of months or even years and will be able to identify whether a source is consistently much higher or lower than the rest of the market. If this is the case, a reporter may go back to the source and seek more clarity on their data and their position in the market, such as whether there a reason why they see the market in a substantially different way to others.

If there are further concerns, or questions about a potential conflict of interest, we may engage our compliance department. Dialogue will be kept open with the data submitter concerned in order to understand the disconnect between certain data points and the rest of the market.

There may be instances where it is concluded that a source is in breach of our data submitter policy and their data is excluded from price discovery.

How do you define a conflict of interest? Doesn’t everyone in the market have a vested interest in seeing the market move in one direction or another?
We expect that any data contributor will have a position in the market – an interest in seeing price move up or down – and that this may change from time to time. A market participant would be deemed to have a conflict of interest if their involvement with another party inhibits their interest in securing the best price for their material, whether buying or selling. A data contributor would be expected to declare a conflict of interest.

Metal Bulletin hosted a free web seminar discussing its approach to price discovery in illiquid markets on Tuesday September 12. Click here to listen to a recording of the web seminar.

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