Potential rival to LME would be costly; tie-up an option

LONDON (Reuters) - The idea of launching a platform to rival the London Metal Exchange, the world’s biggest market for industrial metals, is unlikely to become reality without large amounts of capital but a viable alternative could be a tie-up with another exchange.

Men walk past the London Metal Exchange (LME) in London, July 22, 2011. REUTERS/Paul Hackett/File Photo

Former LME chief executive Martin Abbott raised the concept after being approached by brokers, unhappy with a steep rise in fees and a move to boost volumes by trying to attract more speculators and funds.

A potentially cost-effective option is a link-up with another exchange such as the CME Group, already trying to enter LME territory with new base metal contracts and expanding its network of warehouses.

“Clearing, infrastructure and other systems are already in place,” a metals industry source said. “If the people backing Abbott don’t want to fund a new platform, they could go for an option like this.”

It was unclear exactly how an arrangement with another exchange would work.

Sources said the proposal for a new platform had generated interest across all sectors of the industry, including consumers, producers, trading houses and brokers, but that few would be prepared to put up the cash.

Still, a source familiar with the situation said: “An active series of discussions potentially leading to a funded consultancy project to determine the feasibility of the plan, is taking place in the City and internationally.”

Abbott declined to comment.

Other options include an over-the-counter (OTC) platform, which would be the cheapest possibility, or a full-blown exchange.

Premvir Jain, head of metals at technology solutions firm Openlink, estimates the cost of building a basic online OTC platform from scratch at $100 million in the first year.

Operating and development costs could amount to about $25 million a year, “but would depend on the number of products”, Jain said. “You could get a basic product out in a year.”

Also cited as an obstacle would be liquidity, which would mean inefficient pricing. Commitments to deal through any new platform would be needed, but that could mean liquidity being split between exchanges.

“Look at this as people hoping it will push the LME into rethinking its strategy,” the head of a commodity brokerage said.

The exchange has been on a drive to promote monthly dates in its electronic trading system to attract funds, which members say will erode liquidity on the trading floor where benchmark prices are set.

“Growth in electronic activity on the LME has predominantly been in three-month trading, and has had no impact on volumes (on the floor),” the LME, owned by Hong Kong Exchanges and Clearing, told Reuters.

Another major grievance against the 139-year-old LME is fee hikes of around 31 percent in January 2015.

Reporting by Pratima Desai; Editing by Dale Hudson