In 2015, the LME embarked on the ‘Liquidity Roadmap’, a plan to boost market transparency and increase the number of investor participants as well as volumes.
Within two years, LME volumes were down and eating into the exchange’s profits, a consequence of business migrating to the over-the-counter (OTC) market. Something had clearly gone strategically awry, and the LME chief executive officer at the time, Garry Jones, departed the exchange.
Now the LME has a new plan to not just attract investors but to also stem the flow of business to the OTC market, including to the numerous OTC platforms that have been created over the years.
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In a White Paper proposal published earlier on Wednesday September 4, the LME’s pivotal focus is introducing block trades for bilaterally negotiated transactions.
From the second half of 2025, small trades on liquid dates of up to 10 lots would have to be placed on LMEselect, the exchange’s electronic trading platform. If, after five seconds, the order was not filled on the system, then the trade can be taken off the screen and crossed by the member.
If you’re wondering what would prevent business simply shifting away from the LME to the OTC market, the LME thought of that too.
The same block trade rules would apply to OTC contracts of ten lots and below referencing LME prices or infrastructure. They would also affect trades on the various dealer-to-client platforms that have emerged in recent years, and which offer proprietary monthly pricing direct to clients.
Hard to get around that, then.
The block limits apply to trades on the monthly date out to one year, and carries between those monthly dates, on the LME’s five most liquid metals – aluminium, copper, zinc, nickel and lead.
The limits don’t apply to daily prompt dates or cash outright trades, nor to ring trades, conditions that are designed to protect and provide comfort for the physical community at the very heart of the exchange’s ecosystem.
All of these changes would take place using version 10 of LMEselect, which is in testing phase with members, and which will be rolled out fully early next year.
In announcing the planned changes, the LME also revealed some interesting facts about the composition of its trading volumes.
The biggest surprise is that 48% of LME trades are on LMEselect, with the ring accounting for less than 1% and the remaining majority being inter-office bilateral transactions.
That’s obviously not a bad thing – electronic markets couldn’t handle the many bespoke dates or averaging services that are provided in the inter-office market by members to their clients.
But that’s where the next statistic comes in: the LME also noted that 75% of open interest resides on the third Wednesday monthly dates, yet just 2% of those monthly volumes are traded on LMEselect.
Clearly the LME believes there is room to boost that 2%, increasing liquidity and transparency on the electronic monthly contracts that the investment community claims it wants to trade but cannot because a liquid price doesn’t exist on LMEselect.
There will, naturally, be opposition from certain members, particularly smaller dealers who use the inter-office market, and larger dealers who are active in operating member-to-client screens. The latter has become a sizeable business for banking participants as well as a few Category I and II members of the exchange.
It is, however, very difficult for those participants to argue that clients would be better off trading these small volume transactions off-exchange in so-called dark pools, instead of consolidating pricing for small transactions in a more transparent, liquid central order book on the LME, eventually creating tighter spreads.
Former LME CEO Jones long maintained a dogged belief that future growth for the exchange would come from electronic participants. With a keen eye to balancing the need to protect core physical users of the exchange, current CEO Matthew Chamberlain must certainly believe so too.
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