Photographer: Simon Dawson/Bloomberg

Quest for Cheaper Metals Trading Drives Talks to Start LME Rival

  • Brokers and ex-LME CEO are reviewing options for new platform
  • Talks are preliminary and may not result in alternative market

In the face of sliding volumes and tougher regulation, the London Metal Exchange may be getting a new challenge: more competition.

Martin Abbott, who orchestrated the LME’s sale to Hong Kong Exchanges & Clearing Ltd., is now leading a group of brokers to study alternatives to the exchange. Brokers on the exchange are concerned that trading has become too expensive and there is a “disconnect” between metal markets and users, Abbott said in an interview.

"There is certainly more dissatisfaction with the LME and its fee structure and general attitude than I can ever recall," Malcolm Freeman, a director of West Malling, England-based brokerage Kingdom Futures Ltd. who has been in the metals business for more than three decades, said last week. "It seems to many clients that alternatives to the LME will have to be sought."

Before the takeover in 2012, the LME was owned by its members and the business strategy was to benefit them, rather than maximize profits. The new management, led by Chief Executive Officer Garry Jones, has sought to turn the world’s biggest metals exchange into a commercial operation by increasing fees and attracting new types of users. At the same time, the LME overhauled warehouse regulation amid calls for tougher rules on commodities trading.

Less Expensive

"A number of brokers have been talking about alternatives to the incumbents, partly because of a perception that business could be done less expensively,” said Abbott.

Kathy Alys, a spokeswoman for the LME, declined to comment.

Abbott is forming a study group to explore the potential for a metals marketplace that could include an exchange or trading platform, he said on Monday. Interested parties are invited to join and fund research looking at various ways of developing a platform, he said, adding that the talks are preliminary.

“One of the possible outcomes could be to conclude there is no feasible way to create a new market," he said. Abbott left the LME in 2013 after the Hong Kong takeover and is a director at Ambrian Plc and Mitsui Bussan Commodities Ltd.

Trading Fees

The discussions stem from a search to find cheaper trading after the LME increased trading fees by an average 34 percent last year and added charges for using its data. Under the new management, the LME has also tried to attract high-frequency traders and promoted monthly-settled contracts, which are used by U.S. metals exchanges.

The 139-year-old institution faces declining volumes amid a pullback from commodities and competition from CME Group Inc. During the first four months of the year, LME futures trading fell a combined 10 percent for its six main contracts, including copper and aluminum. That was the worst start to a year since at least 2006.

The LME still dominates metals trading with a global market share of about 76 percent.

"People can be unhappy but they are still going to trade where they can find counterparties," said Christopher Gilbert, a professor at the Johns Hopkins University’s Bologna Center in Italy, who has followed the LME for more than four decades. "People won’t move where there is no liquidity. Liquidity is on the LME. The LME has got a leading position in the nonferrous metals market."

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