One of the largest commodity trading exchanges is LME, the London Metal Exchange. It has existed for more than one hundred and forty years, during which time it has been modernized several times to meet the needs of the UK economy. On the history of the exchange, the rules of trade and interesting facts of its formation, read on.
Tin Soldier in a Copper Helmet
The industrial boom, the sharply increased demand for copper and tin in the mid-19th century became the main causes of LME.
Continuous innovation while traditionally maintaining the rules of conducting business transactions determines the main principles of the London Metal Exchange.
Its creation in 1877 was dictated by time. The coincidence was not accidental - anticipated the emergence of the exchange important events: increasing supplies of copper and tin from Chile and Malaysia to the UK, constantly changing metal prices on the London stock exchange.
At that time - the beginning of the 19th century - in the UK there was one Royal Exchange. She was crowded with a wide variety of merchants: from charterers to financial tycoons. Merchants wishing to receive guarantees for the timely supply of metals needed a new place where they could calmly negotiate prices. After all, the longest import time was the most dangerous for both sides of the deal for copper: it is not known how the price will change until the ship arrives with raw materials to a buyer from distant countries.
Official opening of the exchange
Interested traders from European countries began to gather in Great Britain to conclude exchange transactions on raw metal. They chose the Cornhill coffee house near the Royal Exchange. It was there that the ring tradition was born - the ring, when the person who wanted to sell drew a circle in sawdust on the floor of the establishment, in the center indicated the price and shouted: βChange!β Everyone who wanted to take part in the trade gathered around the ring and made their proposals. The concepts and traditions of open outcry trade - with a voice in the ring (in a circle) - are still preserved.
In 1876, at the initiative of metal dealers, a metal exchange was registered in London, which opened on January 1, 1877 and is still operating. The exchange ceased to operate only during the Second World War until 1949.
Trading rules: for everything about everything - five minutes and three months
The main invention of the exchange is a fixed-term contract LME. A unique feature of LME-contracts is that they are concluded daily for a period of three months with fixing the price of metal at the time of delivery. In the first years of the exchange's existence, this period was determined by the time it took to deliver goods from Chile to the UK.
A fixed-term contract showed its uniqueness in the following: traders can safely sell raw materials until the goods arrive at the contract price, without loss from falling prices on the exchange. Over time, fixed-term contracts have not changed.
Exchange trading, like many years ago, is carried out daily, except for weekends and holidays. In several approaches or sessions:
the first auction starts at 11:45, ends at 14:45;
The next session starts at 14:55 and runs until 17:00.
According to the results, the price is announced.
During the sessions, each metal is traded twice, with one metal trading time of five minutes.
The results of the bidding become the official daily price for each type of product, it is announced according to the results of the second bidding of the first or morning session.
In order to fix a deal, you need to determine the number of contracts, their price. All participants with the right to conclude transactions in the ring are seated in orange chairs facing each other, in a circle, and shout their proposals within 5 minutes. Transactions are made with voice. Then, the concluded contracts go through the mandatory registration procedure at the Exchange Clearing House - LME Clear.
In transactions with a voice are indicated: the volume of supply of goods, terms and conditions of delivery, requirements and quality standards of the purchased goods.
Types of Contracts, or Six Aces in Your Pocket
In the late eighties of the last century, aluminum and nickel began to be traded on LME (London Metal Exchange). The exchange is becoming the largest in the field of non-ferrous metals trading.
New contracts based on six raw materials appeared on the London Metal Exchange: copper, tin, zinc, lead, nickel, aluminum. These are LMEX index contracts, they have been introduced since 2000.
In fact, the metal index is designed so that investors have access to futures (future) transactions for non-ferrous metals without their physical delivery and costs associated with the storage and conduct of transactions.
There are monthly futures LME-minis, they are focused on cash payments for copper, aluminum, zinc. Since 2010, small futures for molybdenum, cobalt have been launched.
As an addition to the contract, offers for cash transactions SteelScrap and SteelRebar became available. They allow investors to secure money, buy up part of the goods and not only save money, but also get additional profit on the price difference when selling it, relying on metal quotes during trading on the London Stock Exchange.
Risk insurance at the conclusion of a transaction against influence and price changes in the future is the basic function of the London Metal Exchange. This operation is called hedging. held on the exchange since its official foundation and is one of the reasons for creating the exchange. Hedging allows you to minimize future risks for traders.
New times - new owners
The metal market has changed over the last century, and the global content of exchange contracts is changing with it, new metals, including precious metals, are introduced as necessary, but the rules of trade remain unchanged.
In 2012, LME (London Metal Exchange) was bought by the operator of the Hong Kong Stock Exchange Hong Kong Exchanges & Clearing Limited, so LME Clear appeared, which aims to improve settlement and trading systems for metal dealers.
Created additional electronic calculations for more effective sales.
Not with bread alone, but with non-ferrous metals
In addition to mandatory exchange transactions, LME has become a real school of market economics, and therefore has opened up opportunities for:
- The development of exchange games at a price difference, which helps contract holders to increase the profitability of trading on the exchange.
- Capital investment in raw materials, this is much more profitable than ordinary financial transactions.
- Financing stock exchange warehouse holders with the right to dispose of goods. This operation is called a landing and allows you to get the necessary capital, with the calculation of the further delivery of goods.
- Arbitration - when different traders trade simultaneously on exchanges of several countries.
Management and trading system
The London Non-Ferrous Metals Exchange is managed by the Exchange Committee.
In turn, exchange members have a different status, which allows or does not allow transactions on the LME. There are six status categories of participants:
- With maximum rights, including the right to trade in the ring. Today, the exchange allows nine participants to trade in the ring.
- All rights except trading in a circle.
- Having the right to conduct their own clearing transactions, but without the right to trade in the ring.
- Brokers providing services, but not eligible for the transaction.
- Private individuals with the right to make transactions as clients.
- Honorary participants in the exchange who do not have the right to make trade transactions.
Strategy Efficiency - Streamlined Metal Trading
To assess the scale of operation of this largest exchange of non-ferrous metals, it is enough to calculate the amount of raw materials traded.
- The amount of aluminum sold daily is more than 12 billion in dollar terms.
- Copper on the London Stock Exchange daily traded in the amount of three billion dollars.
- One day of trading zinc can reach up to 4 billion dollars, which in physical terms is about two tons of zinc.
- Up to forty tons of nickel in sales brings a turnover of 1 billion dollars.
The London Non-Ferrous Metals Exchange is the guarantor of the trading parties, possessing warehouse property with goods in various countries and parts of the world.
Since the summer of 2017, LME has introduced trade and interaction with the precious metals exchange, gold contracts and silver futures. Negotiations with the International Gold Trading Committee were held to prepare the trade. The fact is that, as noted by analysts, this market has become obsolete: the volumes and level of information provided to traders do not satisfy the needs of modern transactions. Therefore, negotiations (in the context of the new LME policy) by the London Precious Metals Exchange in order to ensure transparency of transactions in the precious metals market turned out to be so important.
Conclusion
The London Metal Exchange (precious and non-ferrous) is one of the most important in the world. More than two hundred lots go through the exchange every year, physical deliveries are made under futures contracts in volumes exceeding 4 billion tons of metals. The exchange secured three quarters of the metal futures market in the world market.