January 14, 2015 / 1:56 PM / 5 years ago

UPDATE 1-London Metal Exchange launches plan to lure funds, boost liquidity

* Aims to increase trading on third Wednesday each month

* Fund managers want standardised way to trade (Adds details, background)

By Eric Onstad

LONDON, Jan 14 (Reuters) - The London Metal Exchange (LME) launched plans to boost liquidity on its electronic platform LMEselect on standard monthly dates to increase business from financial investors, such as hedge funds.

Fund managers, who are not interested in hedging physical metal, want a more standardised way to trade LME contracts to ensure that they can buy and sell large amounts easily.

The LME, the world’s biggest and oldest market for industrial metals, said in a statement on Wednesday it was kicking off a four-week consultation on the plans.

This will include relaxing the order-to-trade ratio on the third Wednesday each month, the standard settlement date.

“By enhancing liquidity on LMEselect for these ‘third Wednesdays’, we believe we can meet demand for a more traditional futures-style trading,” said Matthew Chamberlain, head of business development at the LME.

The 137-year old exchange, owned by Hong Kong Exchanges and Clearing Ltd (HKEx), said last October it was working on plans to attract more financial investors such as speculators and funds.

Boosting liquidity is one of several initiatives to increase profitability of the LME after HKEx acquired the exchange for $2.2 billion in 2012.

The exchange, Europe’s only financial market that still uses open outcry trading, accounts for about 80 percent of overall global futures and options trade in base metals.

Miners and industrial users love its flexible set-up, which allows them to lock in prices on any day for a three-month period.

But having hundreds of possible expiration dates is a nightmare for fund managers, who want to trade a standardised contract electronically.

The LME aims to attract fund managers with more liquidity on the “third Wednesdays” while leaving intact the wide spread of dates that producers and industrial users need to hedge physical metal.

Relaxing the order-to-trade ratio would allow greater participation on those Wednesday settlement dates while the LME also said it planned to provide an incentive programme for users, which could contribute further liquidity.

The order-to-trade ratio limits the number of orders per traded lots inputted into LMEselect.

It was originally implemented as a control mechanism to protect LMEselect from high volumes of orders from high frequency traders.

In the future, the LME said it wanted to provide a new pre-trade risk management tool on LMEselect, which will enable clearing members to set limits for all client orders.

This would give them more confidence when allowing their clients direct access to the exchange, the LME added.

Reporting by Eric Onstad, editing by Louise Heavens and Susan Thomas

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