LME WEEK 2016: LME, users must work collectively to stop migration – Marex

The London Metal Exchange and its users need to work collectively if they are to reverse the exchange’s declining fortunes, Marex Spectron global head of base metals Simon van den Born told Metal Bulletin.

LME revenue fell 11% in January-September to HK$1.178 billion ($152 million) from HK$1.322 billion a year ago. Meanwhile, average daily volume (ADV) in its metal contracts was 10% lower over that period.

The exchange lowered fees for the short-dated carry dates from September 1 but acknowledged that the move was “no silver bullet” in reversing the decline.

While it reiterated that a downturn in the physical market, a weak economic climate, volatility and fund allocation also played a part in falling business levels, many users continue to blame high fees.

“It’s not about fault – but if we don’t do something as a collective then basically we are going to find that business will continue to migrate off [the LME],” van den Born said in an interview during LME Week.

Global head of Marex Spectron, Simon van den Born

“As businesses continue to try and be efficient, they will find the most efficient platform to go to – if that happens to be the CME, SGX, SHFE – whatever, they will come up with [competing] contracts,” he added.

Clients will naturally gravitate to an exchange where it is – or is perceived to be – cheaper to trade, which increases the risk that liquidity becomes fragmented.

“It is in our interest to promote the exchange, it is in our interest to promote turnover and it’s in our interest to arrest the downside. It’s not a margin issue – it is turnover and turnover has been hit,” van den Born said.

“What’s more concerning is the CME has seen an increase in volumes. What people are asking is ‘what do the CME have that the LME do not have?’,” he added.

The fundamental bedrock of the LME is its physical players. But these are now “priced out” of LME trading so they increasingly go over the counter (OTC), which lowers liquidity, van den Born said.

“Meanwhile, the new type of client is more used to a US or SHFE contract and, because volumes are migrating away from the LME, those guys are not being attracted to the third Wednesday product,” he said.

“They see this as an exchange where the bodies are dissipating and not increasing and they are going to… the likes of the CME,” he added.

The LME is unique in that its daily prompt date structure allows users to hedge down to the day. Its futures contracts then trade daily out to three months forward, weekly up to six months and monthly up to 123 months in the future.

But the exchange has since 2015 explored ways to boost participation and liquidity on its electronic platform, LMEselect, focusing on increasing liquidity on existing standard monthly ‘third Wednesday’ dates to provide a simpler way to trade those futures.

This has raised concerns – played down by the LME but reiterated this week by van den Born – from some quarters that the LME will lose its uniqueness and transition towards a standardised futures exchange.

"[The date structure] is a system that worked – it’s a hybrid that worked for all for a good period of time,” he said. “If you don’t have that component, then what you have is something that looks very much like a CME or SHFE and then what do you have?”

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