The London Metal Exchange

The London Metal Exchange is the world centre for industrial metals trading and price-risk management. More than 80% of global non-ferrous business is conducted here and the prices discovered on our three trading platforms are used as the global benchmark.

History

International trade in metals could be said to have commenced in Britain when the Romans invaded in AD43 and extracted the large deposits of copper and tin ore in Cornwall and Wales to satisfy their increasing domestic need for the production of bronze and alloys.

However, the origins of the London Metal Exchange can only be traced back as far as the opening of the Royal Exchange in London in 1571 during the reign of Queen Elizabeth I.

In the early 19th century there were so many commodity traders, ship charterers and financiers using the Royal Exchange that it became impossible to do business.

Industrial Revolution

In the early part of the 19th century the U.K. was self sufficient in copper and tin and quoted prices remained fixed for long periods. Everything changed with the the Industrial Revolution when the UK became the most technologically advanced country in the world, importing large tonnages from abroad.

The metal traders were now faced with a real problem because, having bought ores and concentrates from as far away as Chile and Malaya, they had no way of knowing what the price would be at the time of the ship's arrival some months later.

Technology came to their aid with the invention of the telegraph. Now merchants were able to anticipate the time of arrival of a cargo of metal and were able to sell it for forward delivery on a fixed date, thus protecting themselves against a fall in price during the voyage.

Three-month delivery of metal

In 1869 the opening of the Suez Canal reduced the delivery time of tin from Malaya to match the three months delivery time for copper from Chile. This gave rise to the LME's unique system of daily prompt dates for up to three months forward which still exists to this day.

1877 - LME formed

In 1877 they formed the London Metals and Mining Company and moved into their first premises over a hat shop in Lombard Court.

Membership increased rapidly and, after surpassing the three hundred mark, the decision was taken to move to a purpose built Exchange in Whittington Avenue, where it remained for 98 years.

Then, after a period of 14 years at Plantation House in Fenchurch Street, the Exchange moved in 1994 to its current home in Leadenhall Street.

Trading on the LME

The London Metal Exchange is the most liquid industrial metals market in the world.

More than 80% of global non-ferrous on-exchange business is conducted on our markets, equating to $14.6 trillion, 4 billion tonnes and 171 million lots in 2013.

Trading on the LME often exceeds world metal production by a factor of 40.

Participants can trade six different contract against 11 underlying LME metals on a choice of three platforms.

Clients wishing to access our markets must do so through an LME member, all of which are regulated by UK regulator the Financial Conduct Authority. The LME itself is largely self-regulated. 

Trading platforms

Electronic

Telephone

Ring

Contract types

Participants can trade one of our 11 underlying metals using futures, options, TAPOs, LMEswaps, LMEminis and our index product, LMEX.

Our contracts allow all those along the metal supply chain, as well as investment communities, to hedge against or take on price risk. Designed with the metal community at its core, our daily, weekly and monthly prompt date structure mirrors physical trading.

All LME contracts are traded in lots - which vary in size from 1 to 65 metric tonnes depending on the underlying metal - and are priced in US dollars.

The LME publishes official exchange rates to enable settlement in pound sterling, Japanese yen and Euros, as well as US dollars.

Futures

LME futures provide members of the metal and investment communities with the unparalleled opportunity to transfer and take on price risk.  

A futures contract is the obligation to buy or sell a standard quantity of a specified asset (metal) on a set date, at a fixed price agreed today.

Unique

Our futures are unique and designed to mirror physical trading. Our prompt date structure enables participants to buy and sell futures daily out to three months, weekly out to six months and monthly up to ten years.

Settlement and clearing

Futures that are not ‘closed out’ by an opposite sale or purchase are physically settled. All LME futures are settled on the prompt date with initial and variation margins called during the term of a contract. 

Options

An option is the right, but not the obligation, to buy or sell a futures contract at a price (the strike price) agreed today.

They give hedgers and investors a more flexible alternative to futures. When buying an option the purchaser is not entering into a firm obligation - they are simply buying a choice of action.

This choice allows a hedger the opportunity of locking in a fixed price, or a speculator the chance of benefitting from price movements, while maintaining the ability to simply walk away from the contract if it doesn't suit.

The American-style options trade monthly up to 63 months.

TAPOs

Traded Average Price Options (TAPOs) give the metal community a flexible way of hedging against fluctuations in the Monthly Average Settlement Price (MASP).

This is particularly useful because a large proportion of physical contracts are negotiated basis the MASP.

Like traded options, a buyer of a TAPO has the right, but not the obligation, to buy or sell at a price agreed today. The settlement price is calculated based on the average settlement price of the month.

 

LMEswaps

Hedge against the monthly average, in one simple trade

LMEswaps are designed specifically for members of the metal community who need to hedge against the monthly average price. They are the first of their type in the world to be traded on-exchange and available for all LME non-ferrous metals.

Tradable on LMEselect and the 24-hour telephone market, LMEswaps enable participants to enter into a fixed price and settle the difference against the floating price (the Monthly Average Settlement Price or MASP) at the end of the averaging period – all in one simple trade.

On-exchange

LMEswaps are traded on-exchange, so pre- and post-trade prices are transparent and trading is regulated. Participants also benefit from the counterparty protection associated with contracts traded on-exchange – namely default protection and member-to-member counterparty risk elimination via LCH.Clearnet.

 

LMEminis

LMEminis are cash-settled futures traded in lots of five tonnes. They are designed to appeal to market participants who want exposure to global metal prices, but prefer to trade monthly, cash-settled contracts.

LMEX

London Metal Exchange Index (LMEX) futures are designed to provide participants with a simple way of gaining exposure to the LME's six primary non-ferrous metals.

Accessing the market

The only organisations able to trade contracts on the LME are its member firms. However, you do not have to be an LME member to trade on the LME. Clients who have successfully opened an account with an LME member are able to trade with and through them to access the market.

Prospective users of the Exchange can be assured that they are dealing with professional, recognised and experienced trading firms who are fully regulated for the capital and conduct of their business. Regulation of the market is carried out by the LME, while the UK’s Financial Conduct Authority and Prudential Regulation Authority are responsible for regulating the business of LME members.

Members buy and sell futures and options contracts on behalf of customers and themselves.

Members can trade electronically using LMEselect via Independent Software Vendors (ISV), as well as Ring and telephone trading.

Brokers

An LME broker refers to a Member company that provides a customer with access to the market.

Brokers will often act in a dual capacity, trading their own account in addition to trading with clients and other market members.

There are three broker membership categories:

Ring dealing (category 1) - entitled to trade on all platforms, including the Ring

Associate broker clearing (category 2) - has access to electronic and telephone trading

Associate broker (category 4) - can issue LME contracts, but cannot clear trades

Metals

The LME is the trading and price-formation venue for industrial metals globally. Participants can trade one of 11 metals and an index product using futures, options, TAPOs, LMEswaps and LMEminis.

Non-ferrous metals 

LME participants can trade and take or make delivery of aluminium, copper, tin, nickel, zinc, lead, aluminium alloy and NASAAC. Non-ferrous prices discovered on our platforms are used as the global benchmark.

Steel billet

The LME provides a single reference price for steel billet, enabling improved risk management for the steel industry.

Minor metals

The LME provides the minor metals community with a market of last resort for cobalt and molybdenum as well as transparent daily pricing and essential hedging tools.

Precious metals

On behalf of the London Bullion Market Association (LBMA) the LME promotes, markets and distributes precious metals spot prices and closing forward rates. The LME also provides gold forward clearing in partnership with LCH.Clearnet.

Trading venues and systems

The LME provides the market with three transparent and regulated platforms for trading industrial metal contracts:

The Ring

11.40 - 17.00

The Ring, our open-outcry trading platform, is central to the process of price discovery. Prices are discovered during a highly liquid five-minute ‘Ring’ session for each metal. These prices are used by the world over as the global benchmark and in the setting of the LME Official Settlement Price, the price at which all LME futures contracts are settled.

LMEselect

01.00 - 19.00

LMEselect is our highly liquid electronic platform for the trading of all LME contracts. Offering low-latency access via proximity hosting and rich multi-order type functionality, LMEselect is available to members and their clients (via member sponsored access).

Inter-office telephone market

24 hours

The Exchange also supports an inter-office telephone market between LME members, which operates 24 hours a day. All LME contracts can be traded over the telephone.