“Soviet Metal Exchange”: LME is frustrating traders by freezing the nickel market

The London Metal Exchange has infuriated some of the world’s most influential electronic traders after closing the nickel market and unleashing thousands of deals in response to soaring metal prices.

A few months after the 145-year-old exchange confused traditional users by considering ending noisy face-to-face trading, the LME launched nickel trading (a market that sets global benchmarks) this week. It was closed. 1985.

Crisis measures have made a big bet on nickel prices after the value of metal more than doubled in two days and reached a record of over $ 100,000 per ton, the Tsingshan Holding Group, China’s leading stainless steel group. It happened because I left a big guy behind and faced billions of dollars. Potential loss.

However, the exchange canceled all 5,000 nickel transactions worth about $ 4 billion on Tuesday. Mark Thompson, Vice Chairman of the West of Tungsten and a longtime trader at the LME, estimated that the exchange had wiped out $ 1.3 billion in P & L. “For the benefit of the entire market,” LME said.

Some market participants say the exchange has crossed the line by effectively scrubbing the day from the record book. Not only did the LME not manage the risk, they said they chose the side when they needed to be neutral.

Nearly 150 years ago, the LME ranked traditional users last year by considering ending a noisy face-to-face transaction. Eventually, the direction of the plan was reversed. © Bloomberg

AQR, one of the world’s largest hedge funds, is exploring legal options in a dispute with the LME after losing significant profits from exchange decisions, people familiar with the matter say. ..

In a series of posts on Twitter, Cliff Asnes, founder of the $ 140 billion fund, described LME as a “slime ball.” , Gee, someone else, a broker who didn’t manage things well, may suffer. ”

“I’m blaming you [the LME] The LME denied that its parent company, the Hong Kong Stock Exchange, influenced the decision.

The exchange is in talks with its regulator, the Financial Conduct Authority, and the Prudential Regulation Authority, which oversees its clearing house, and the regulator refused to comment on this issue.

This issue benefits from successful bets on the value and direction of a product with members who trade on behalf of users who want to purchase physical goods for use in the manufacturing industry.

LME CEO Matt Chamberlain had to cancel the deal because the size of the short position involved in the nickel surge showed systemic risk.

“One of our key responsibilities is to serve physical traders,” he said. .. And it should have put a lot of stress on many core members. “

Last year, Chamberlain was dissatisfied with plans to close the trading floor and fully digitize the market in response to active opposition from traders and industrial users. Electronic traders are now making a fuss. Alex Gerko Ichiba, co-chief executive of electronic market maker XTX, has named it the “Soviet Metals Exchange”.

“It can be very damaging to its reputation. It’s electronic vs. physical. It reflects the LME’s thinking, not the larger growing financial community, but the senior citizens’ club. Is to protect, “said a former senior executive involved in the LME.

The organization behind the transaction has the right to close the transaction, which is rarely used.

Line graph of nickel contract price ($ / ton) showing LME benchmark nickel record highs

The clearinghouse manages the risks that can occur when a trader’s bet grows too large and stands between transactions to prevent defaults from spreading across the market. In this case, the LME clearinghouse had the right to close the Tycoon transaction. Athanassios Diplas of Deutsche Bank’s former credit risk manager Diplas Advisors said he couldn’t afford the margin to support them.

He also said the exchange has a “default waterfall” of financial resources available in the event of a crisis: “The first party likely to be affected defaults before anyone else. Is a party to. ” What’s happening here? “

Part of the problem, according to people close to the situation, is that Kiyoyama’s position is very large, held primarily in derivatives that are not traded on the exchange, and taken out to multiple banks. The exchange saw only one-fifth of the full position. Only this week, when the bank disclosed its holdings, I realized it was in full swing. It is up to Kiyoyama’s brokers, who are facing potentially huge trading losses, to close these off-exchange positions.

“We are currently focusing on how the market can be reopened as efficiently and quickly as possible,” the LME said in a statement on Friday.

Chamberlain admits that breaking the knot to satisfy all members can be more than an exchange and is facing a battle to reestablish trust with electronic users.

“We have a job to rebuild the reputation of the market in that segment. What I think this offers us an opportunity is to ultimately implement the market protection we need.” He said.

These protections may include increasing disclosure of customers’ off-exchange positions. This is a move that Chamberlain pushed forward as CEO, but was resisted by banks. The LME has also imposed some emergency measures, including a 10% cap on nickel movements.

The exchange occupies a global share of products such as aluminum, copper, nickel and zinc, ahead of the Chicago futures exchange CME Group.

Nickel is used in electric vehicles and is expected to become a battlefield in the future. Currently, CME does not have a nickel futures contract, but LME’s stumbling block can be pushed by frustrated traders and encourage rethinking.

Yao Hua Ooi, co-head of AQR’s Macro Strategy Group, said:

“If they [the LME] “If they lose their position in this metal, LME’s growth opportunities will be very disastrous,” said a former executive. “If they don’t respond, CME will have lunch and the price benchmark will be from London. Will leave. “”

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