Chris Evans
The London Metal Exchange (LME) is making changes to increase liquidity by moving more block trades onto its electronic platform, LME Select. While some members feel the proposals encroach on their business, LME believes they will improve transparency. Meanwhile, LSEG has expanded its Advanced Dealing platform to enhance efficiency in bilateral trading, using AI to streamline negotiations and reduce errors.
- London Metal Exchange review aims to force more liquidity onto the exchange
- Bilateral relationships remain integral to market structure and trading volumes
- LSEG Advanced Dealing improves efficiency of bilateral trading
Proposed changes by the London Metal Exchange to the way its members book trades show how different this market is to others and how it will remain so, for now at least (Modernising the market | London Metal Exchange).
The LME is attempting to move more block trades agreed between its members and their clients onto the exchange. Additionally, members would have to work certain client orders on an agency basis or give an indicative price to a customer and post the order to LME Select, the LME’s electronic venue. Other members would for a short period of time can hit the order, potentially giving the client an improvement on the original member’s price.
Unsurprisingly the proposals have not landed well with LME members who may feel believe the LME is encroaching on their turf. The LME, for its part, believes the changes will enhance transparency and liquidity.
The LME no doubt feels emboldened to improve transparency in its markets following the trauma of the 2022 “nickel crisis”, when it says OTC positions contributed to a dramatic spike in prices. But while the LME has certainly moved its fence further into members’ territory, the exchange remains very much a foreign land compared to other markets.
Importantly, the LME has again resisted calls to convert itself to a futures-style market with full direct market access to participants. Trading will still need to be channelled through members, who, as a result, will continue to control how trades are booked and market liquidity.
There are good reasons for the LME’s caution. The bespoke nature of deals registered at the LME creates multiple tickets that the LME can charge for. It would need to be very confident that opening the market to new participants trading CME-style metals futures would compensate for volumes lost by abandoning its benchmark 3-month contract.
The LME hopes that its proposals are enough to move more trading onto LME Select but not so aggressive that they break the business model of the members who supply its liquidity.
The LME might be wise to err on the side of its existing membership. It is arguable that liquidity in metals trading is always going to be constrained compared with other commodities such as WTI or Brent. The LME’s most traded contracts aluminium and copper do OK, but others such as lead and tin benefit from the market making of its members.
The LME is in its very essence a hybrid market; a mix between physical markets and futures, big and small, old and new. This is reflected in the nature of the data from the market that LSEG publishes, and from this April the tools that we supply to those trading metals.
LSEG’s Messenger service has always been an important way for members to communicate with customers. We have now added new automation to Messenger via our Advanced Dealing platform.
Advanced Dealing uses Artificial Intelligence to extract key economic data from negotiations between counterparties, which is then sent to back-office systems. It reduces errors and improves efficiency for both LME and OTC trading.
The LME’s changes will for sure add complexity to the ways its members can book trades. Fortunately, LSEG’s Advanced Dealing can help those members continue trading with each other and their customers in the most productive way.
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