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24 February 2021

Slaying Sacred Cows

What are the most widely known distinctive features of the LME? That’s a pretty easy question - open outcry and the rolling prompt date system. What are the two features of the LME most difficult for outsiders to grasp? I think the answer’s probably the same - open outcry and the rolling prompt date system. How both came about is not difficult to understand. 

Open outcry, because that’s what every market was in the nineteenth century; the others all reacted more quickly to a changed environment - and who is to say that the LME was wrong to persevere? But as we’ve seen from the latest discussion document and as I am led to believe the sentiment now is, that change is going to happen. 

Rolling prompt dates help the metal trade manage its inventory and risk control; when the metal trade was the strongest influence on the market, then the structure of the contracts was not significantly up for debate.

However, that’s no longer the case. While I would agree that it is difficult at times to distinguish what is ‘trade-related’ trading and what is using one’s financial clout and market knowledge to buy and sell copper, aluminium and nickel, in particular, even if we leave out what is not clear, it is obvious that the weight of money coming into the market today is speculative. All right, call it investment if you will, but whichever  term you prefer, it’s money looking for capital gain rather than hedge protection of risk. 

That’s been the case for a while, of course; I don’t claim to be outlining new territory here. But, the admission that the closure of the Ring is now up for serious debate does open the door to other, what might previously have been regarded as existential, discussions. If the Ring can go, why not the rolling prompt date?

After all, while it is true that for Manfred in the Ruhr it is useful to be able to trade dates to match his exposures, for Chuck at his investment fund/bank desk in New York, it’s just a pain; he’s got myriad markets to watch, and all except one trade a single monthly prompt. And half the year, he doesn’t want to trade that one anyway, so when he does come to it, it’s just irritating. Why can’t it be like all the others? And in the engine room in the far east? Same divide, I suspect, and I think we all know where the biggest flow of money comes from. 

But what about the brokers? They need the date adjustment flow to make most of their money, as commissions have been driven into the ground for years now. That’s where the timing comes in. The brokers’ role and influence has been waning for a long time now, since they no longer really control access to the market. Add to that the fact that since the sale of the LME, the brokers no longer have any particular vested interest in its success - all they need now is a venue to buy and sell, which could be Shanghai, New York, or frankly a black box liquidity pool residing  in a warehouse anywhere.

When one puts all the factors together, I think I can see where they lead. Many things in life start slowly, and then pick up speed like a snowball rolling down the hill. The real tipping point for the LME was its sale to an outside interest (that should not be taken as a criticism, by the way, just an observation); that weakened the link between market and (ex)members, and that in turn opened up the likelihood of significant change. Like Pandora’s Box, once it’s opened, you can’t control what comes out. In years to come, metal trading will be either genuine, physical movement of metal from producer to consumer, or just another screen amongst the many on the multilateralist, generalist investment trader’s desk. The point where the two interface - which is where many of us lived for years, called the LME - is getting vanishingly small. The trade won’t like it, but how long is it since they called the shots?

Once you’ve slain your first sacred cow, the next one seems much easier………


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