Nov 1 The London Metal Exchange said on Friday
it will enforce tighter rules for "open-outcry" floor trading on
a permanent basis following a trial to increase transparency
amid regulatory pressure across financial markets.
The decision comes after the world's biggest base metals
exchange launched a three-month test of the new rules on its
copper contract in April as part of an effort to curb sharp
price moves at the end of the shouted "open-outcry" sessions.
It was expanded in July to cover its six other metal
contracts other than steel billet, cobalt and molybdenum.
The initiative was a response to the spotlight that
regulators shined on all benchmark pricing mechanisms after the
Libor rigging scandal last year that exposed interest rate
manipulation by banks in London, traders have said.
The move may also help the world's oldest metals exchange
fend off criticism that trading in its base metals is too opaque
and vulnerable to distortions.
The LME, which was bought last year for $2.2 billion by Hong
Kong Exchanges and Clearing (HKEx), has come under
fire from producers, consumers and traders for its handling of a
years-long crisis over its warehousing policy.
Consumers have complained that some warehouse firms
registered with the LME have built up stocks and allowed queues
to grow for clients seeking to withdraw material, all the time
charging rent for storage.
End-users say those steps have caused long wait times that
have distorted supplies and inflated physical prices.
U.S. regulators are probing the issue and end users such as
MillerCoors LLC has said the British authorities need to
increase their oversight of the exchange.
U.S.-based Alcoa and larger aluminium producer Rusal
of Russia have called on the exchange to release more
detailed data on long and short positions as well as
About a dozen trading companies and banks pay the LME for
the right to send traders on to the circular floor known as the
"Ring" in the LME building on Leadenhall Street in London's City
financial district, where they shout bids and offers and clinch
deals on their own behalf or that of clients.
While many other financial markets have scrapped such voice
trading to conduct business electronically and by telephone,
many metals traders say retaining open outcry as well offers the
best way to discover prices that truly reflect the market.
Faith in this mechanism means businesses worldwide use some
prices reached in Ring trading as the basis for their trades in
physical copper, aluminum, lead, tin, zinc and nickel.
But sources have said previously some LME members and the
exchange itself worry that floor traders often do not take on
orders that are big enough to truly represent the market at the
end of the last part of the day's open outcry business, the
The fear is that these crucial prices, used by market
participants to calculate daily profit and loss, can be based on
trading of a few or even one lot - 25 tonnes in copper's case.
The new rules, which set a minimum deal size during the
final kerb, will come into effect on a permanent basis on
Monday, the LME said in a notice to members on Friday.
That means any deal at the final kerb trading close must be
for a minimum of 10 lots, with some exceptions. For tin for
instance, dealers must be prepared to take five lots unless the
tonnage is stated.
The change seeks to prevent the closing price of a metal
being based on small tonnages, which could skew the level.
A larger minimum trading size would also help reduce the
potential to deliberately push prices one way or another in the
moments before the 5:00 p.m. kerb close, traders have said.
Unlike the Libor rate, which is based on bankers' opinions,
the LME's metals levels are traded prices. There is no
suggestion of any regulatory investigation of any LME price
But all exchanges are alert to increased scrutiny of
benchmarks which is beginning to focus on precious metals price
discovery, which uses a different method to LME mechanisms.