It’s time to talk about the London Metal Exchange (LME). The venerable old institution that sets the global reference price for metals such as aluminium and copper seems to be lurching from crisis to crisis.
Volumes are down. They fell 4% in 2015 and another 8% last year, the first time since the turn of the century activity has contracted over two consecutive years.
Discontent is up, particularly among the core broker community, which has bridled at higher trading fees and lambasted the exchange’s wooing of financial players.
The LME’s chief operating officer Stuart Sloan left in December. One month later came the resignation of its chief executive officer Garry Jones.
To lose one senior office is unfortunate, to lose two in such quick succession suggests deeper tensions with the LME’s owner Hong Kong Exchanges and Clearing (HKEx), which has been trying to monetise its massive $2.2bn investment in the London exchange.
Rivals are lurking in the wings. CME Group, which has historically only competed with the LME in the copper space, has been rolling out new contracts for other metals at an accelerating rate.
Somewhere under the radar is a potential new metals trading platform project led by Jones’ predecessor Martin Abbott.
More pressing is the drift of trading liquidity into the over-the-counter shadows.
Is the LME broken? And if it is, how is it going to be fixed?
Jones’ departure has been the trigger for a bout of collective soul-searching among the LME’s members as they attempt to answer those two key questions.
At the heart of the debate is the Gordian knot of fee structure, date structure and trading structure.
The LME is a very strange institution. Electronic trading co-exists with both a telephone market and open outcry in the form of the talismanic leather-seated “ring”. It trades daily prompts out to three months, weekly prompts between three months and six months and then monthly prompts thereafter, the whole system rotating around a continuously moving three-month “anchor” prompt.
Excepting the new steel contracts, it is not cash settled, which injects a credit dimension to an already complex ecosystem. Let’s face. If you started from scratch, you’d never come up with such a labyrinthine format.
But that’s the point. The LME was never consciously designed. Rather, it has organically evolved over a century of trading practice. That rolling three-month date, for example, harks back to the sailing times of copper-laden vessels from Chile to London at the turn of the 19th century.
Which seems as anachronistic as dealers sitting around a ring shouting at each other just as they did a century ago.
But this weirdly wonderful market structure has not only worked but has proved remarkably resilient over time.
The genesis of this crisis was the hike in trading fees at the start of 2015.
In particular the hike of fees on short-dated spreads, first and foremost “tom-next”, which denotes the spread between tomorrow and the day after.
The cost of trading “tom” had in the past been so negligible it was in effect a free trade for players rolling daily their inventory price risk.
When that stopped being the case, volumes nosedived.
Total volumes in aluminium, the LME’s most liquid contract, fell by 9% in 2015 and by 10% last year, but aluminium “tom-next” volumes plunged by 24 and 23% respectively.
While industrial users voted with their feet, the LME tried to compensate for the loss of volume by opening its membership to new “liquidity providers” such as Chicago high frequency trader Jump Trading, deepening the rift between industrial and financial parts of the LME trading community.
The LME subsequently relented on those short-dated carry fees but for many it was a case of too little too late.
And the debate has since moved on to encompass other parts of the LME’s unique structure such as that rolling three-month “anchor” price.
Because unless a user trades in and out of the three-month date on the same day, it becomes a multi-leg trade with higher fees since the position has to be adjusted one day forward to catch that Chilean shipping time.
Reformists, many of them sitting in the financial camp, are suggesting an evolution to something a bit more, well, conventional, simplifying both trading and fee structure.
Traditionalists counter that the uniqueness of the date system is the “sine qua non” not just of the open outcry “ring” but of the whole market.

Andy Home is a columnist for Reuters. The views expressed are those of the author.