Chamberlain said the focal point of the LME’s proposals are the monthly dates, which the investment community in particular has indicated it would like to trade but cannot due to a lack of liquidity.
“The LME has a fantastic dates structure and associated features that make our physical market offering best in class. As you can imagine, we don’t and wouldn’t do anything that would in any way change that,” he told Fastmarkets in an interview on Wednesday September 4.
“But we also know good markets benefit from liquidity, and liquidity is enhanced by bringing in players from all different types of end clients,” he added.
He cited the example of the LME’s lead contract, which was added in 2023 to the Bloomberg Commodity Index (BCOM).
“I’ve heard nothing but positive feedback from both financial and physical clients about the way [the addition of lead to BCOM] enhanced liquidity and volume in the lead market [and] made it easier to hedge, invest and price,” Chamberlain said.
He noted that a set of clients – both financial and physical – would like to have the simplicity of using standard monthly dates.
“I think it’s in everyone’s interests that those clients have as efficient an execution experience as possible and that we encourage more business and new participants in the market,” Chamberlain said.
“We have an incredible opportunity to move forward as an integrated trading community for an outcome that’s clearly good for the client in terms of liquidity, good for members in terms of enhanced volumes and trading opportunities and positive for the exchange in terms of its volumes and ability to offer liquidity to the market,” he added.
The LME said in a White Paper that from the second half of 2025, small trades on liquid dates of up to 10 lots would have to be placed on LMEselect, the exchange’s electronic trading platform. If after five seconds the order is not filled on the system, then the trade can be taken off the screen and crossed by the member.
The plan also applies to over-the-counter (OTC) contracts of 10 lots and below referencing LME prices or infrastructure, as well as trades on the various dealer-to-client platforms that have emerged in recent years and which offer proprietary monthly pricing direct to clients.
Equally important is what has not been included in the plan, Chamberlain said.
“None of the averaging, bespoke dates, cash dates or large trades where liquidity is not immediately displayed on screen would be affected,” he said.
“We have the ability to be very nuanced in the way that we introduce this in order to reflect market structure, best practice and standardization where that’s appropriate on the monthly dates and to really protect what makes the LME unique on other dates,” he added.
Currently, around 48% of LME volume is traded on LMEselect, with the ring accounting for less than 1% and the remaining majority being inter-office bilateral transactions.
Chamberlain said he would be very satisfied if the plan eventually resulted in around 60% of volume being traded on LMEselect.
“We will always have a bigger inter-office market on the LME than any other exchange, because we have got the averaging, the bespoke dates and some very big clips [of business] going through as a result of being a big industrial exchange. I don’t think we would ever look to force that business on to the screen, because it just wouldn’t work,” he said.
“But that extra 10-12% is absolutely crucial because it’s the percentage of people who currently want to trade on LMEselect but don’t. If we go too high and force people on to LMEselect that don’t want to be there, we will have failed, just as much as if the percentage is too little,” he told Fastmarkets.
“The ‘just right’ amount is the percentage of people who want to be on LMEselect – currently, we’re below that level. We want to get to exactly the right number, and not a percent more,” he added.
Block trade thresholds are already a feature of the LME’s peer exchanges, Chamberlain said, adding that the exchange nonetheless is not aiming to be the same as them.
“Our peer exchanges don’t have a dates structure, averaging, a set of members who will provide access to bespoke pricing, a cash price every day. We have all those things, and we are not touching them; they are not in any way impacted by our block limits,” he said.
“I strongly believe we can learn from peer exchanges where relevant to the financial segment of the market and give people a more peer-like exchange execution experience. But for the physical business, we have nothing to learn from the different exchanges,” he added.
The exchange is planning to set up a working group drawn from its members to discuss the proposals, with meetings expected to start from October, Chamberlain said.
The LME will also launch a liquidity provider program, initially focusing on the spreads from three-month to the nearby monthly dates and some monthly-to-monthly spreads, he said.
A key element of being able to proceed efficiently with the plan will be the launch early next year of version 10 of LMEselect.
The new platform will have improved functionality and deliver a more deterministic low-latency trading platform with additional features that help support electronic trading, the LME said.
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