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By Avril Fou
The London Metal Exchange is considering launching contracts that will enable traders to buy and sell single lots that are one hundred times larger than its current benchmark weight of 25 tonnes, market sources said.
The 2,500-tonne contracts — dubbed the “megas” by eager hedge funds and ring dealers — will only be available in the ring and on the phone, traders said.
“Size does matter,” one big-market mega-backer said.
“The bid offer spread may be wider on the megas than the midis [the LME’s benchmark 25-tonne contracts] on LME Select, but users can choose either to execute piecemeal electronically or in a single mega trade in the ring. We think the megas will be highly attractive to the hedge fund community,” he added.
The megas have been created by the exchange in response to many traders’ complaints that LME Select has too many one-lot orders. Many traders believe that the computer algorithms that generate the one-lot orders are very predatory when a trader is trying to buy or sell in volume. The ring-based mega will enable market users to sidestep this problem.
The megas will complement the LME’s 25-tonne contracts and its 5-tonne minis.
“We’ve got minis and megas now. The spreads may be wider on the megas than the midis [the LME’s benchmark 25-tonne contracts] but the the funds that want to be big, can get big on the megas.”
By providing megas for the ring dealers to trade, the close at 5pm is expected to be far more orderly.
“The ring is a thriving marketplace, and we want to attract liquidity,” one senior ring dealer said.
More succinctly, the floor trader added: “Funds want it large? Let’s ’ave it. When an algo wants a Mega he’ll have to go to the corner shop and buy an ice cream.”
This mega initiative is due to be discussed at the next meeting of the floor trading committee on April 1.