ON THE BORDER: How to turn clients on to the LME’s monthly prices

A report on the massive scale of Asian futures trading volumes shows that the London Metal Exchange must do everything it can to draw in Chinese retail investors and hedge funds. So shouldn't it open its monthly contracts to them?

A report on the massive scale of Asian futures trading volumes shows that the London Metal Exchange must do everything it can to draw in Chinese retail investors and hedge funds. So shouldn’t it open its monthly contracts to them?

The Global Derivatives Volume Survey 2015 may be a dull title but its contents are not without a certain frisson if one knows where to look. Published by the USA-based Futures Industry Assn (FIA), it catalogues the volumes traded on some 54 futures trading exchanges around the world.

In reading it, I cannot help but turn into some deranged futures quiz master. What was the largest metals contract by trading volume in 2015? Yup, the Steel Rebar Futures, Shanghai Futures Exchange at a whopping 541 million lots traded. The second largest metals contract? Yup, Iron Ore Futures, Dalian Commodity Exchange, 259 million lots.

In fact, Chinese Exchange metal contracts are the first five most heavily traded futures contracts globally, and then there’s LME Aluminium, a distant sixth, at 59 million lots.

Asian volumes tell a tale
And it’s there the problem starts to emerge. Steel and iron contract volumes in China grew 32% and 164%, respectively, in 2015, while LME Aluminium shrank 8.5%. In fact, you may not know it but Hong Kong Exchanges & Clearing (HKEX), owner of the London Metal Exchange, also has a futures trading arm, Hong Kong Exchanges. But which exchange is the most active? Surprisingly, it’s Hong Kong Exchanges at a steady 189 million lots, up 33% in 2015. The LME on the other hand totalled only 169 million lots, having shrunk by 4.3% in 2015.

Simple arithmetic will tell you the astonishing fact that the SHFE Steel Rebar contract alone trades more than three times all the LME exchange contracts added together. The LME, if it was still independent, would rank only mid-table at around number 25 of all exchanges in terms of executed contracts in 2015.

So why is that a problem? Well, it is if you continue to think you are the world’s most important metals trading venue. One can only wonder what volumes the SHFE will execute following full international access. On the other hand, the LME can point to its rising income in 2015, due in part to its raising of fees and developing its own clearing house LME Clear. LME Clear was a long-term initiative of former LME ceo Martin Abbott.

In 2015, LME trading volumes were actually diminishing. Although one could blame falling commodity prices and the slowdown in China, other exchanges were building up their executed volumes. The 28 exchanges in the AsiaPacific region grew their volumes by 33.7% last year and are now taking 39% of the global market.

What can the LME do?
So if the real story of the Global Derivatives Volume Survey is Asian growth then how should the LME address it? If we assume the producer/consumer/merchant business in Asia is static then clearly Asian contract growth is driven by an influx of retail and hedge fund investors. The LME has gone a long way to attract this business through its Liquidity Roadmap strategy, whose central plank is to simplify the LME trading methodology by transforming LME third Wednesdays into “months” as an alternative to the traditional three-month rolling date methodology.

Up until now, the volumes traded on the LME’s monthly contracts have been light, but then most potential users in Asia have been excluded from trading, as these monthly contracts are not presented on the electronic trading platforms typically offered to clients in Asia.

 This would seem to be an oversight by the LME — and an opportunity for a nimble broker in Asia.

BANDS Financial, which believes these monthly contracts may be attractive to its clients inside China and outside, has seized the opportunity and now offers monthly LME contracts to its customers in the region on its electronic order-routing platform in both English and Mandarin.

I will keep you posted on how this business develops.

John Browning
Managing director, BANDS Financial Ltd