LME Launches New Pricing Model to Attract Smaller Users, Investors

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A London Metal Exchange press release this week announced the exchange’s introduction of a new pricing option on its electronic trading platform, LMEselect.

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Following feedback from the LME’s 2017 consultation exercise, the exchange has extended the implied pricing mechanism already in operation on the LMEprecious market to be available across copper, aluminum, zinc, lead, nickel and tin base metals.

Implied pricing would extrapolate prices for contracts that mature on the third Wednesday of each month from trading activity on its most heavily traded liquid three-month date by generating an artificial price from bids on the three-month date and carry trades connected to the third Wednesday date, Reuters reports.

The exact workings of the contract are probably of less importance to the user than the objective behind it and the opportunity it brings.

The idea is the new contract will allow investors to trade on one prompt date each month rather than the greater variety currently available of any day in the month. The contract would therefore be simpler to trade and similar to the system used by the CME.

Chief Executive Matthew Chamberlain was quoted by Reuters as saying: “We expect this additional option will appeal to those smaller fundamental financial investors not currently accessing our market who will now have the opportunity to see and trade quoted prices on the screen.”

Indeed, it may appeal to a wider range of investors, but we hope it may also assist the large number of smaller metal trade consumers and processors who currently struggle to access hedging opportunities due to their smaller volumes.

Being simpler to administer, the implied pricing product will, it is hoped, be cheaper to operate and available to smaller players (a drawback of the current LME system that MetalMiner raised with the exchange back in 2017 during the consultation process).

The new contract launches from July 30. While buy-sell spreads may be marginally wider with implied prices, that will not worry smaller consumers anxious to access the exchange’s hedging opportunities.

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It remains to be seen once the price launches how quickly volume ramps up, but early indications suggest it should prove popular.

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