Comparing the two exchange’s volumes on a like-for-like basis is difficult because they offer contracts with different specifications and different sizes – 25 tonnes per lot in the LME’s copper contracts and 25,000 lb per lot on the CME forwards.
But converting the CME data into tonnes and comparing the volume in the LME three-month contract against the CME’s first two active contracts – reflecting the shift in liquidity from one to the other – shows a tipping point is nearer than ever, according to a two-week moving average (2 WMA) of data from Bloomberg.
On October 25, LME copper trading volume was 958,723 tonnes compared with 752,211 tonnes on the CME, according to Bloomberg data – a difference of 206,512 tonnes.
This compares with volume of 1,040,300 tonnes on the LME on January 4, 2016 – the first trading day of the year – and 442,626 tonnes on the CME, a difference of 597,673 tonnes.
The true picture is more complex. LME liquidity is spread across around 190 tradable contracts due to its prompt date structure and LME data covers not just Select trading but broker-to-broker volumes too.
“The LME’s three-month contract represents only about 40% of total LME trading, and hence trading volume comparisons between exchanges can be misleading, as venues have different trading profiles and market structures,” an LME representative said.
At a broad level, though, the data is illustrative of the narrowing trend between volumes on the two exchanges, several sources close to the matter confirmed.
On an aggregated volume basis, the CME has a share of around 19% of the market. But comparing three-month volume on LMEselect against the active contract on Globex, the CME accounts for about 66% of the total, a well-informed source told Metal Bulletin.
Average daily volume (ADV) in LME copper in September was down 13.1% year-on-year to 139,079 contracts although total monthly volume was up 1.8% month-on-month at 3,059,736 contracts. The ADV on the CME, however, rose 8.05% to 61,620 contracts from 57,034 contracts in September 2015. There is no guarantee that the trend will continue, however, market observers warned.
In the third quarter of 2016, ADVs on both exchanges were lower quarter-on-quarter. LME copper ADV in the third quarter totalled 413,101 contracts, a drop of 18.9% from the second quarter’s 509,942 contracts, while CME copper ADV fell 17.8% to 218,693 contracts from 266,326 contracts in the second quarter.
CME open interest was on an upward trend until it peaked in June “and now it’s back to normal”, an analyst said.
“This increase started last August when the yuan devalued and everyone went short on CME… year-on-year volumes are up but, compared with June, that is when the growth peaked and that could be where it ends,” he added.
In the third quarter, copper open interest on the CME was down 6.2% year-on-year. LME open interest in this period, meanwhile, was down just 1.4%, which one source attributed to the fact that the exchange typically has less volatility.
The more volatile a market, the higher the risk for an investor; lower LME volatility generally means that price fluctuations there are steadier. A decline in open interest tends to reflect an exit in money from the market.
Speaking at the LME Week Seminar in London on Monday October 31, ceo Garry Jones attributed lower volumes principally to a downturn in the physical markets that underlie the exchange’s trading contracts; many exchange users, though, have blamed it on a rise in fees on short-dated carries.
“What is interesting is that [the fall in volumes] is clearly a long-trend and therefore can’t actually be blamed on fee increases alone,” a market observer said.
This article was first published on www.fastmarkets.com.