LME rips up its free-market rule-book to tame wild metals

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You can tell it’s new to price limits.

The venerable 145-year-old institution’s first attempt to restart its broken nickel market was over in chaotic minutes on Wednesday as the price immediately fell to - and briefly through - the lower 5% daily limit at $45,590 per tonne.The LMESelect electronic trading platform evidently hasn’t read the memos and keeps allowing small numbers of trades to be executed outside of the new limits.

This is in part due to the LME’s own dysfunction. The nickel crisis has exposed fundamental flaws in the exchange’s regulatory scope. The price risk embedded in often bespoke contracts is channeled to the LME via banks and brokers, who net off differing positions as much as they can before trading any residual risk in the LME system.

Alan Whiting, the executive director of the UK Treasury’s regulation and compliance department, wrote the LME rule-book and even he conceded in 1998 that “while the exchange does not seek to favor shorts, backwardation limits do penalize longs, whereas there is currently no equivalent financial penalty on the misuse of dominant short positions.”

But Doctor Copper turned wild in October last year, forcing the LME to intervene in its flagship metals contract as available stocks fell to just 14,150 tonnes.

 

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