London Metal Exchange
Encyclopedia
The London Metal Exchange (LME) 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, along with longer-dated 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.
It is located at 56 Leadenhall Street
in the City of London
.
At first only copper
was traded. Lead
and zinc
were soon added but only gained official trading status in 1920. The exchange was closed during World War II
and did not re-open until 1952. Other range of metals traded was extended to include aluminium
(1978), nickel
(1979), tin
(1989), aluminium alloy (1992), steel
(2008), and minor metals cobalt
and molybdenum
(2010). 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 month's time, the custom stemming from the times that metal cargos originally took in 1877 on their voyage from the ports of Chile
.
The LME issues, each day, detailed figures on how many tons of each metal is in its warehouses, which helps producers and consumers make correct business decisions.
Open-outcry is the oldest and most popular way of trading on the exchange. It is central to the process of price discovery
, a term used to describe 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, but a lot 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 sessions last from 11.40 until 13.10 and from 14.55 until 16.15, each session includes a 10-minute break). 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 (traded average-price options, a form of Asian options).
The LME is the last exchange in Europe where open-outcry trading takes place.
, are authorised under the Financial Services and Markets Act 2000
, and are regulated by the Financial Services Authority
. Each metal is traded in its own five-minute period. There are two sessions every trading day for each metal.
Ring Dealing Members are Clearing
Members, who hold the exclusive right to trade in the ring;
In addition to the 12 companies who have exclusive rights to trade in the Ring, around 100 companies are involved in the LME in total.
and silver
, are not traded on the London Metal Exchange, but on the over-the-counter
market usually referred to as the London Bullion Market
, by the members of the London Bullion Market Association. Platinum
and palladium
are traded on the London Platinum and Palladium Market. Both members of the LBMA and LPPM trade the precious metals spot market on EBS
(Electronic Broking Systems)—acquired by ICAP
in June 2006. Many companies involved in minor metals are members of the Minor Metal Trade Association.
The LME does, however, provide trade matching and clearing services to the London bullion market and distributes gold, silver, and gold IRS (interest rate swaps) forward rates on behalf of the LBMA.
software house called Cinnober. The platform is a FIX-based trading platform, and has a significant and increasing share of the total LME business.
Hedge (finance)
A hedge is an investment position intended to offset potential losses that may be incurred by a companion investment.A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, many types of...
, worldwide reference pricing, and the option of physical delivery to settle contracts.
It is located at 56 Leadenhall Street
Leadenhall Street
Leadenhall Street is a street in the City of London, formerly part of the A11. It runs east from Cornhill to Aldgate, and west vice-versa. Aldgate Pump is at the junction with Aldgate...
in the City of London
City of London
The City of London is a small area within Greater London, England. It is the historic core of London around which the modern conurbation grew and has held city status since time immemorial. The City’s boundaries have remained almost unchanged since the Middle Ages, and it is now only a tiny part of...
.
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
Copper
Copper is a chemical element with the symbol Cu and atomic number 29. It is a ductile metal with very high thermal and electrical conductivity. Pure copper is soft and malleable; an exposed surface has a reddish-orange tarnish...
was traded. Lead
Lead
Lead is a main-group element in the carbon group with the symbol Pb and atomic number 82. Lead is a soft, malleable poor metal. It is also counted as one of the heavy metals. Metallic lead has a bluish-white color after being freshly cut, but it soon tarnishes to a dull grayish color when exposed...
and zinc
Zinc
Zinc , or spelter , is a metallic chemical element; it has the symbol Zn and atomic number 30. It is the first element in group 12 of the periodic table. Zinc is, in some respects, chemically similar to magnesium, because its ion is of similar size and its only common oxidation state is +2...
were soon added but only gained official trading status in 1920. The exchange was closed during World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
and did not re-open until 1952. Other range of metals traded was extended to include aluminium
Aluminium
Aluminium or aluminum is a silvery white member of the boron group of chemical elements. It has the symbol Al, and its atomic number is 13. It is not soluble in water under normal circumstances....
(1978), nickel
Nickel
Nickel is a chemical element with the chemical symbol Ni and atomic number 28. It is a silvery-white lustrous metal with a slight golden tinge. Nickel belongs to the transition metals and is hard and ductile...
(1979), tin
Tin
Tin is a chemical element with the symbol Sn and atomic number 50. It is a main group metal in group 14 of the periodic table. Tin shows chemical similarity to both neighboring group 14 elements, germanium and lead and has two possible oxidation states, +2 and the slightly more stable +4...
(1989), aluminium alloy (1992), steel
Steel
Steel is an alloy that consists mostly of iron and has a carbon content between 0.2% and 2.1% by weight, depending on the grade. Carbon is the most common alloying material for iron, but various other alloying elements are used, such as manganese, chromium, vanadium, and tungsten...
(2008), and minor metals cobalt
Cobalt
Cobalt is a chemical element with symbol Co and atomic number 27. It is found naturally only in chemically combined form. The free element, produced by reductive smelting, is a hard, lustrous, silver-gray metal....
and molybdenum
Molybdenum
Molybdenum , is a Group 6 chemical element with the symbol Mo and atomic number 42. The name is from Neo-Latin Molybdaenum, from Ancient Greek , meaning lead, itself proposed as a loanword from Anatolian Luvian and Lydian languages, since its ores were confused with lead ores...
(2010). 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 month's time, the custom stemming from the times that metal cargos originally took in 1877 on their voyage from the ports of Chile
Chile
Chile ,officially the Republic of Chile , is a country in South America occupying a long, narrow coastal strip between the Andes mountains to the east and the Pacific Ocean to the west. It borders Peru to the north, Bolivia to the northeast, Argentina to the east, and the Drake Passage in the far...
.
Commodities traded
The LME offers futures and options contracts for aluminium, aluminium alloy, NASAAC (North American Special Aluminium Alloy), cobalt, copper, lead, molybdenum, steel billet, 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 required.The LME issues, each day, detailed figures on how many tons of each metal is in its warehouses, which helps producers and consumers make correct business decisions.
Ring trading
Trading Times: 11:40 — 17:00, London TimeOpen-outcry is the oldest and most popular way of trading on the exchange. It is central to the process of price discovery
Price discovery
The price discovery process is the process of determining the price of an asset in the marketplace through the interactions of buyers and sellers ....
, a term used to describe 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
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
. 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, but a lot 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 sessions last from 11.40 until 13.10 and from 14.55 until 16.15, each session includes a 10-minute break). 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 (traded average-price options, a form of Asian options).
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 London Clearing HouseLCH.Clearnet
LCH.Clearnet is an independent clearing house based in Europe that serves major international exchanges and platforms, as well as a range of OTC markets...
, are authorised under the Financial Services and Markets Act 2000
Financial Services and Markets Act 2000
The Financial Services and Markets Act 2000 is an Act of the Parliament of the United Kingdom that created the Financial Services Authority as a regulator for insurance, investment business and banking.-Outline:...
, and are regulated by the Financial Services Authority
Financial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
. Each metal is traded in its own five-minute period. There are two sessions every trading day for each metal.
Ring Dealing Members are Clearing
Clearing
Clearing may refer to:* Glade , a tract of land with few or no trees in the middle of a wooded area* Deforestation, the clearing away of trees to make farmland* Clearing , the process of settling a transaction after committing to it...
Members, who hold the exclusive right to trade in the ring;
- Amalgamated Metal Trading Limited
- Barclays Bank Plc
- E.D. and F. ManMan GroupMan Group plc is a British alternative investment management business. It provides a range of funds for institutional and private investors globally. The company manages about US$68 billion and employs around 1,700 people in 15 locations worldwide.Man’s headquarters are at Riverbank House...
Commodity Advisers Ltd - J.P. Morgan Securities Ltd
- MAREX Financial Ltd
- Metdist Trading Ltd
- MF GlobalMF GlobalMF Global , formerly known as Man Financial, was a major global financial derivatives broker. MF Global provided exchange-traded derivatives, such as futures and options as well as over-the-counter products such as contracts for difference , foreign exchange and spread betting. MF Global was...
UK Ltd - NatixisNatixisNatixis is a French corporate and investment bank created in November 2006 from the merger of the asset management and investment banking operations of Natexis Banque Populaire and IXIS ....
Commodity Markets Ltd - Newedge Group (UK Branch)
- Société GénéraleSociété GénéraleSociété Générale S.A. is a large European Bank and a major Financial Services company that has a substantial global presence. Its registered office is on Boulevard Haussmann in the 9th arrondissement of Paris, while its head office is in the Tours Société Générale in the business district of La...
- SucdenSucdenSucden Financial Limited is a commodities and financial futures and options broker, operating for over 35 years. Founded in 1973, Sucden Financial 's parent is Sucres et Denrées SA, a company incorporated in France...
Financial Ltd - Triland Metals Ltd
In addition to the 12 companies who have exclusive rights to trade in the Ring, around 100 companies are involved in the LME in total.
Precious metals
Contrary to popular belief, the precious metals, goldGold
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...
and silver
Silver
Silver is a metallic chemical element with the chemical symbol Ag and atomic number 47. A soft, white, lustrous transition metal, it has the highest electrical conductivity of any element and the highest thermal conductivity of any metal...
, are not traded on the London Metal Exchange, but on the over-the-counter
Over-the-counter (finance)
Within the derivatives markets, many products are traded through exchanges. An exchange has the benefit of facilitating liquidity and also mitigates all credit risk concerning the default of a member of the exchange. Products traded on the exchange must be well standardised to transparent trading....
market usually referred to as the London Bullion Market
London bullion market
The London bullion market is a wholesale over-the-counter market for the trading of gold and silver. Trading is conducted amongst members of the London Bullion Market Association , loosely overseen by the Bank of England...
, by the members of the London Bullion Market Association. Platinum
Platinum
Platinum is a chemical element with the chemical symbol Pt and an atomic number of 78. Its name is derived from the Spanish term platina del Pinto, which is literally translated into "little silver of the Pinto River." It is a dense, malleable, ductile, precious, gray-white transition metal...
and palladium
Palladium
Palladium is a chemical element with the chemical symbol Pd and an atomic number of 46. It is a rare and lustrous silvery-white metal discovered in 1803 by William Hyde Wollaston. He named it after the asteroid Pallas, which was itself named after the epithet of the Greek goddess Athena, acquired...
are traded on the London Platinum and Palladium Market. Both members of the LBMA and LPPM trade the precious metals spot market on EBS
EBS
-Education:* Educational Broadcasting System is a Korea educational broadcasting-company* Edinburgh Business School, is the Graduate School of Business of Heriot-Watt University...
(Electronic Broking Systems)—acquired by ICAP
ICAP
ICAP may stand for:* Institute of Chartered Accountants of Pakistan* International Center for AIDS Care and Treatment Programs - ICAP* International Computational Accelerator Physics Conference* Internet Content Adaptation Protocol...
in June 2006. Many companies involved in minor metals are members of the Minor Metal Trade Association.
The LME does, however, provide trade matching and clearing services to the London bullion market and distributes gold, silver, and gold IRS (interest rate swaps) forward rates on behalf of the LBMA.
Electronic trading
The LME launched an electronic platform called LME Select launched in February 2001.[5] This was developed by a SwedishSweden
Sweden , officially the Kingdom of Sweden , is a Nordic country on the Scandinavian Peninsula in Northern Europe. Sweden borders with Norway and Finland and is connected to Denmark by a bridge-tunnel across the Öresund....
software house called Cinnober. The platform is a FIX-based trading platform, and has a significant and increasing share 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. However, the small percentage, which does result in delivery, plays a vital role in creating price convergence.Warehouses
To support this mechanism, the LME approves and licenses a network of warehouses and storage facilities around the world. Warehouse companies must meet strict criteria before they are approved for the handling of metals. Warehouse Keepers around the world include the following:- Henry Bath http://www.henrybath.com
- Steinweg http://www.steinweg.com
- Metro International Trade Services http://www.metroftz.com
- Pacorini Metals http://www.pacorinimetals.com