The London Metal Exchange is the futures exchange with the world's largest market in options and futures contracts on base and other metals. As the LME offers contracts with daily expiry dates of up to three months from trade date, weekly contracts to six months, and monthly contracts up to 123 months, it also allows for cash trading. It offers hedging, worldwide reference pricing, and the option of physical delivery to settle contracts. Since 2012 it has been owned by Hong Kong Exchanges and Clearing after LME's shareholders voted in July 2012 to approve the sale of the exchange for a price of £1.4 billion.
History
The London Metal Market and Exchange Company was founded in 1877, but the market traces its origins back to 1571 and the opening of the Royal Exchange, London. Before the exchange was created, business was conducted by traders in London coffee houses using a makeshift ring drawn in chalk on the floor. At first only copper was traded. Lead and zinc were soon added but only gained official trading status in 1920. The exchange was closed upon the outbreak of World War II and did not re-open for copper trading until 1953. The range of metals traded was extended to include aluminium, nickel, tin, aluminium alloy, steel, and minor metalscobalt and molybdenum. The exchange ceased trading plastics in 2011. The total value of the trade is around $US 11.6 trillion annually. Many deals are made for commodities to be delivered in three months' time. The custom stems from the time that copper cargoes originally took in 1877 on their voyage from the ports of Chile. The LME was owned by its members until 2012, when it was sold to Hong Kong Exchanges and Clearing for £1.4 billion.
Commodities traded
The LME offers futures and options contracts for aluminium, aluminium alloy, NASAAC, cobalt, copper, lead, molybdenum, nickel, steel billet, steel rebar, steel scrap, tin and zinc.
Facilities
To trade contracts in copper, tin, or any other metal listed on the LME, one has to trade through an LME member. Purchasers of contracts, which are then left to reach maturity, will receive a warrant for a specific LME approved warehouse to take delivery of the metal if require There are gold and silver and iron NOW
Ring trading
Trading Times are 11:40 to 17:00 GMT. Open-outcry is the oldest way of trading on the exchange, though nowadays the majority of trades are placed electronically. It is central to the process of price discovery, the way LME official prices are established. Prices are derived from the most liquid periods of trading; the short open-outcry ring trading sessions, and are most representative of industry supply and demand. The official settlement price, on which contracts are settled, is determined by the last offer price before the bell is sounded to mark the end of the official ring. There is constant inter-office trading. A relatively small yet important portion of trading is still done by open-outcry in the Ring. There are a morning and an afternoon trade, where each of the nine metal contracts are traded in two blocks with a five-minute session for each contract. The second trading block in the morning is key to setting the Daily Official Exchange rates. After the official trades of sessions one and two, there are 85 and 45 minutes of "kerb" trading respectively. Trades are in futures, options and TAPOs. Whilst the price discovery mechanism used by the exchange is post-trade transparent it is not pre-trade transparent. Pre-trade transparency is required for many securities under the Market in Financial Instruments Directive to achieve fair markets by reducing such illegal abuse as market manipulation. The LME is the last exchange in Europe where open-outcry trading takes place.
Ring Dealing Members
Ring Dealing Members are entitled to trade in the Ring during the ring-trading sessions. They may also operate a 24-hour market by trading inter-office. All Ring Dealing Members, as members of the LME Clear, are authorised under the Financial Services and Markets Act 2000, and are regulated by the Financial Conduct Authority. Ring Dealing Members are Clearing Members, who hold the exclusive right to trade in the ring;
The LME launched an electronic platform called LME Select launched in February 2001. This was developed by a Swedish software house Cinnober. The platform is a FIX-based trading platform, and now handles a majority of the total LME business.
Delivery points
As a market of “last resort”, industry can use the LME’s delivery option to sell excess stock in times of oversupply and as a source of material in times of extreme shortage. In reality, physical delivery occurs in a very small percentage of cases on the LME as most organizations use the LME for hedging purposes. The small percentage which does result in delivery, however, plays a vital role in creating price convergence.
Warehouses
To support the physical delivery mechanism, the LME approves and licenses a network of warehouses and storage facilities around the world. Controversy arose in 2013 because the LME took action to limit the use of its warehouses for the hoarding of aluminium. In March 2014, England's High Court found for Rusal, the Russian aluminium company, striking down these rules.
