November 2, 2016 / 10:21 AM / in a year

Red Kite head warns LME fees, high-speed trading hit volumes

LONDON (Reuters) - The London Metal Exchange should further cut fees and review rules that may give high-speed traders an unfair advantage, the founding partner of Red Kite Group, Michael Farmer, said on Tuesday.

Farmer, who has earned the nickname Mr. Copper for his long experience in industrial metals trading, warned that rising fees and high-frequency trading will further cut liquidity on the LME, which has suffered sliding volumes this year.

High-frequency trading (HFT) uses super-fast computers and connections to place large numbers of orders at lightning speeds.

“High-frequency trading appears to have no other purpose than to make money from the trading of other participants by jumping ahead of them,” Farmer said during metal industry gathering LME Week in London.

“This does appear to me to be an unfair advantage and could be described as front running,” he said in a keynote speech at the LME Week dinner.

In front-running, which is illegal, a broker or trader places their own orders in front of those from incoming clients that are expected to impact the price.

The Red Kite Group, which has hedge funds, physical trading and mining finance, has $2.3 billion of assets, surviving in a sector that has seen many other participants close down during a tough period of falling prices.

Farmer said the LME’s rules and regulations might “unwittingly give some users unfair advantage over others, particularly in the brave new world of electronic platform trading”.

He added: “This will without doubt reduce liquidity, volumes on the LME.”

The LME has sought to boost electronic trading to lure more speculators and boost volumes, but this has sparked a battle with some members who worry about perceived threats to the traditional LME structure based on physical business, including from miners and fabricators.

The LME, however, has shelved plans to make it cheaper and easier for speculative funds to trade to avoid fuelling further conflict with traditional members, sources told Reuters this week.

CUT FEES AGAIN?

Farmer, also a member of the British House of Lords, urged the LME to take another look at its fees, which caused a backlash from many customers when they were hiked.

LME volumes have been tumbling since the exchange imposed a hefty 31 percent increase in average trading fees in January 2015.

The exchange, the world’s oldest and largest market for industrial metals, relented, cutting fees by 44 percent for short-term trades, but said in August it planned no further fee cuts.

Farmer warned the LME, owned by Hong Kong Exchanges and Clearing Ltd., competitors were waiting in the wings to grab its business.

“If costs of trading on the exchange are prohibitive, it will drive customers away and the golden goose will die of malnutrition,” he said.

“Many users will still find the cost of trading to be high and I would strongly recommend the LME to consider further reductions to attract liquidity back.”

Reporting by Eric Onstad; Editing by Alexandra Hudson

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