London Metal Exchange (LME)

General Information & Regulation

The London Metal Exchange (LME) is a futures & forwards exchange with the world's largest market in standarised forward contracts, futures contracts and options on base metals. The exchange also offers contracts on ferrous metals and precious metals. As the LME offers contracts with daily expiry dates of up to three months from trade date, weekly contracts to six months, and monthly contracts up to 123 months. It also allows for cash trading. It offers hedging, worldwide reference pricing, and the option of physical delivery to settle contracts.

History

The London Metal Market and Exchange Company was founded in 1877, but the market traces its origins back to 1571 and the opening of the Royal Exchange, London. Before the exchange was created, business was conducted by traders in London coffee houses using a makeshift ring drawn in chalk on the floor.[

At first only copper was traded. Lead and zinc were soon added but only gained official trading status in 1920. The exchange was closed upon the outbreak of World War II and did not re-open for copper trading until 1953. The range of metals traded was extended to include aluminium (1978), nickel (1979), tin (1989), aluminium alloy (1992), steel (2008), and minor metals cobalt and molybdenum (2010). The exchange ceased trading plastics in 2011. The total value of the trade is around $US 11.6 trillion annually.

Many deals are made for commodities to be delivered in three months' time. The custom stems from the time that copper cargoes originally took in 1877 on their voyage from the ports of Chile.

The LME was owned by its members until 2012, when it was sold to Hong Kong Exchanges and Clearing for £1.4 billion

Commodities Traded

The LME offers futures and options contracts for aluminium, aluminium alloy, NASAAC (North American Special Aluminium Alloy), cobalt, copper, lead, lithium, molybdenum, nickel, steel HRC, steel rebar, steel scrap, tin and zinc.

Precious Metals

Contrary to popular belief, the precious metals, gold and silver, are not traded on the London Metal Exchange, but on the over-the-counter market usually referred to as the London Bullion Market, by the members of the London Bullion Market Association. Platinum and palladium are traded on the London Platinum and Palladium Market. Both members of the LBMA and LPPM trade the precious metals spot market on EBS (Electronic Broking Systems)—acquired by ICAP in June 2006. Many companies involved in minor metals are members of the Minor Metal Trade Association.

Ring Trading

Trading Times are 11:40 to 17:00 GMT. Open-outcry is the oldest way of trading on the exchange, though nowadays the majority of trades are placed electronically.[5] It is central to the process of price discovery, the way LME official prices are established. Prices are derived from the most liquid periods of trading; the short open-outcry ring trading sessions, and are most representative of industry supply and demand. The official settlement price, on which contracts are settled, is determined by the last offer price before the bell is sounded to mark the end of the official ring. The LME is the last exchange in Europe where open-outcry trading takes place.[2] The ring was temporarily closed in March 2020 due to the COVID-19 pandemic.[6] In January 2021, LME proposed closing the ring, Europes last open-outcry trading floor, and moving permanently to an electronic system

Electronic Trading

The LME launched an electronic platform called LME Select launched in February 2001.[5] This was developed by a Swedish software house Cinnober. The platform is a FIX-based trading platform, and now handles a majority of the total LME business.