What is the London Metal Exchange?

The London Metal Exchange (LME), founded in 1877, is the world’s largest trading center of industrial metals. It provides futures contracts and options on a number of base and other metals.

The contracts offered by LME have expiry dates which range from daily contracts out to three months, weekly contracts from three to six months, and monthly contracts from seven to 123 months. LME allows cash trading as well as hedging of metals risk via standardized and highly liquid exchange-traded contracts.

The LME offers contracts for zinc, tin, steel billet, nickel, molybdenum, lead, copper, cobalt, North American Special Aluminum Alloy (NASAAC), and aluminum. It has an LME index which enables allows participants to gain exposure to six non-ferrous metals.

One has to be a member of LME to obtain trade contracts in tin, copper or any other listed metals. A purchaser of metal on the LME that does not close out its position will receive a document called a ‘warrant’, representing physical metal held in an LME approved warehouse. However, this is rare and less than 5% of trades on the LME end up being physically settled.

LME trading can be carried by three different means: open outcry, a telephone system or an electronic trading platform. The open outcry system called the Ring, is central to the process of price discovery, and is where the LME’s official prices are set. Each LME metal is traded in highly liquid five-minute Ring sessions, which are themselves representative of global supply and demand.

Costs are based on the most liquid trading periods, i.e., short open-outcry ring trading sessions and the standard industry demand and supply. The official settlement price is the last offer price prior to the sounding of bell which marks the end of the official ring.

LMEselect, the electronic platform launched by LME, integrates with member trading platforms through a fix API (application programming interface), either directly from member sites or through proximity hosted datacentres.

The LME also supports an inter-office telephone system between the LME members, which operates throughout a day. All contracts traded via this system are cleared and settled in a usual way like that of other systems.

References and Further Reading

 

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