FYI | Oct 06 2006
By Greg Peel
The London Metals Exchange is the “world’s premier non-ferrous metal market”, rivalling the world’s busiest futures exchanges in New York and Chicago. Last year the LME turned over 78 million contracts to the value of US$4.5bn.
On the LME one can trade futures and options in aluminium, copper, zinc, lead, nickel and tin as well as commodity indices and plastics. Having originally been established as the market place for metal producers and consumers, thought was not given to the likelihood that the whole world would become obsessed with investing in commodities directly, as an alternative to the age-old tradition of just buying mining company shares.
At 25 tonnes a pop, LME metal contracts are not of the sort of magnitude that entices the new swathe of commodity funds into the fray. There are few more volatile and dangerous markets than the metal markets. What’s more, LME contracts are deliverable, so if you’re not careful you’re going to end up with an awful lot of copper in your post office box.
Because of such previously unheard of investment demand, the LME has wisely moved to introduce a new batch of smaller contracts, which it calls “minis”. As London is home of the Mini, this is rather fitting.
The minis will only be 5 tonnes per contract and will not be deliverable but cash-settled only. All other specifications (purity etc) will be as per the larger contracts. The first contracts will be over copper, aluminium and zinc for settlement each month out to 12 months forward.
Notably, the minis will be screen-traded and not “open outcry” traded like their big brothers. ABN Amro suggests “Many in the industry wonder if these finally spell the end of the LME’s more than 100-year old open-outcry ring trading system”.
While the long-established exchanges of the US still implement open outcry they number among few now left in the world. All new exchanges operate on computer-based systems. As a veteran of both the SFE “snake pit” and the old Sydney Stock Exchange chalk boards myself, I find this trend somewhat sad. But then nostalgia’s just not what it used to be.
In a press release last week, LME CEO Simon Heale said:
“I am delighted to confirm that LMEminis will launch on 20 November 2006. There has been much detailed planning work with LCH Clearnet, LME member firms and select software providers to ensure that this date can be met.
“I am confident that LMEminis will prove to be a successful and complementary addition to the Exchange’s current suite of products and services.”
Let the games begin.
