The London Metal Exchange (LME) has today issued a white paper setting out a package of measures designed to modernise the LME’s market structure, boost transparency and increase price competition, while protecting the unique features of its market that serve the physical metal communities.
Matthew Chamberlain, LME CEO, commented: “The package of liquidity-enhancing measures we’re announcing today marks the next phase of our market structure evolution and is vital for the long-term health and development of LME markets.
“Our daily date system is one of our greatest assets, helping to ensure that our global reference prices are underpinned by real world supply and demand. These future-focused measures – which align with the global regulatory direction of travel – seek to grow participation in our markets, and make our prices as representative and accessible as possible, while continuing to support physical market trading practices.”
Key measures
To increase accessible liquidity on the LME’s electronic market (LMEselect) – particularly on the monthly dates, where many market participants wish to have exposure – the LME will introduce industry-standard block limit rules. This means that small-sized trades involving liquid dates (each monthly date out to one year) and for the most liquid metals (aluminium, copper, zinc, nickel and lead) will have to be executed on-screen. Crucially, to ensure that key physical market trading practices remain unaffected by the new rules, the block thresholds will not apply to daily prompt dates, so member provision of bespoke averaging for physical clients will not be impacted.
These rules also support members in continuing to agree small trades bilaterally with their clients, provided that liquidity is shown on LMEselect for visibility.
Jamie Turner, LME Head of Trading and COO, commented: “Introducing block rules is about increasing price transparency, which will lead to greater price competition and participation. This change will allow traders to maximise access to liquidity in the central venue, either directly or through a member desk or platform. While block rules are standard in most peer markets, we recognise that this will have an impact on members’ business models, and we are committed to working closely with them in a series of working groups over the next 12 months to navigate the implementation details.”
To support the implementation of block rules, the LME will also introduce a liquidity provider programme to encourage on-screen trading in certain liquid instruments at the front end of the curve. Additionally, to further increase transparency, the LME will ensure that all trades (in the liquid dates) agreed in the interoffice market – regardless of their size – are booked into LME systems and published on external market data feeds.
On 19 August, the LME made its new trading platform available in the production environment for member testing, as one of the key steps prior to launch. This system, LMEselect v10, provides a deterministic and low latency system that offers improved functionality for electronic traders, such as the ability to enter “good-till-cancelled” (GTC) or “persistent” order types. Additional functionality will also be rolled out to further support this package of measures, such as recalibrated tick sizes to encourage positive trading behaviours from systematic traders.
To ensure a level playing field and consistent transparency between exchange-traded and OTC markets, the LME intends to apply similar block rule requirements to OTC contracts that reference LME prices and closely align to monthly exchange contracts (or the spreads between these). This will mitigate the risk of volume being incentivised away from the transparent central liquidity pool.
The measures announced in the white paper will be formally consulted on where appropriate over the next 12 months, with the aim of implementing the package of measures in the second half of 2025.
