Updated Apr 13, 2022

What Is the London Metal Exchange (LME)?

What Is the London Metal Exchange (LME)?

The London Metal Exchange (LME) deals in metals futures and options. It is the most significant commodities exchange for options and futures trading of base metals such as aluminium, lead, zinc, nickel and copper. The exchange also allows the trading of precious metals, gold and silver.

The London Metal Exchange is located in London, United Kingdom but has been owned by Hong Kong Exchanges and Clearing since 2012. The prices on the LME are considered the standard global prices for base metals.

Understanding LME

One of the main commodities markets in the world, LME allows the trading of metals options and futures contracts. London Metal Exchange Index (LMEX) is the index that tracks the prices of metals trading on the exchange. In addition, LMEX lists futures contracts of metals.

LME options and futures contracts are standardised based on expiration dates and sizes. Structured expiration dates allow traders to choose from daily, weekly and monthly contracts. The trading size of contracts is called lots and it varies from 1 to 65 metric tonnes.

There are two kinds of market participants on the LME - one who looks to hedge risk and the other who seeks to take on risk. A hedger is more likely a producer or consumer who seeks a position in the future or options contract to protect from movement in future prices in the metal market. Whereas traders or speculators buy or sell metal futures or options for profiting from short-term price movement.

History of LME

The establishment of the London Metal Exchange can date back to the opening of the Royal Exchange in London in 1571. Here, traders in metal and various other commodities began to interact. With Britain becoming a major metal exporter, numerous European Merchants arrived and joined in these activities.

The LME’s website said the ring tradition dates back to the early 18th century in the Jerusalem Coffee House. A merchant willing to sell the possessed metal draws a circle in the sawdust on the floor and call out “Change”. Then, those willing to trade would assemble around the circle and put up their bids and offers.

In 2012, the Hong Kong Exchanges and Clearing acquired the LME. Today, consolidation is a common trend amongst the world’s exchanges. For example, the New York Mercantile Exchange (NYMEX) merged with the Comex commodities exchange in 1994 to create the world’s largest physical commodity exchange. The CME Group acquired the NYMEX in 2008.

Trading metals

The trading of metals takes place in three ways on LME:

1. Open Outcry
2. The LME selected an electronic trading platform
3. The Telephone systems

With advancements in technology, the nature of commodities exchange is also changing rapidly. Today, the electronic trading method is more prominent than the traditional open outcry trading, where traders meet face-to-face in trading pits.

CME Group closed the trading floors on NYMEX in 2016. It was the last of its kind, but most of its energy and metals volume had shifted to computers. Similarly, a year earlier, the CME shut down a commodity trading floor in Chicago and ended a 1067 year-old tradition of face-to-face trading.

LME’s physical open outcry trading model still exists, but its future is uncertain. It is the only physical commodity exchange throughout Europe. However, the rapid advancement of electronic trading does not favour the existence of the open outcry model.

Ring trading

Trading occurs in five-minute intervals on the London Metal Exchange in a 6-metre diameter circle or a trading pit. A ring-dealing member has a fixed seat in the ring. Behind every member, an assistant stands and passes orders to the dealing ring member. Assistants also liaise with customers for information regarding market conditions.

Trading instruments divide the ring sessions. For example, steel trading occurs in the first session from 11:40 AM to 11:45 AM, and its second session is 1:10 PM to 1:15 PM GMT. The order of trading instruments in which trading occurs in the 5-minute intervals is - steel, aluminium alloy, tin, premium aluminium, copper, lead, zinc, nickel and cobalt.

The ring trading at LME occurs between 11:40 AM and 5:00 PM, whereas the Inter-office telephone trading is available 24 hours.

Conclusion

The New York Mercantile Exchange (NYMEX) and the Chicago Mercantile Exchange (CME) Group are the two best-known commodity exchanges in the United States. London Metal Exchange (LME) remains the only physical commodity exchange in Europe. COVID-19 has caused LME some difficulties, just like other industries. However, with such rich history, the exchange plans to adopt necessary changes to provide investors with its service and assure commodity traders of a bright future.