London Metal Exchange (LME)

London Metal Exchange (LME)

What is the London Metal Exchange (LME)?

The London Metal Exchange (LME) is a commodity exchange which deals in metal futures and options. LME is a non-ferrous exchange, which means that iron and steel do not trade there. Instead, tradable contracts include aluminum, copper, gold, silver, cobalt and zinc.

Located in London, England, the LME is the global center for the trade in industrial metals, with more than three-quarters of all non-ferrous metal futures trading traded on the stock exchange.

To remember

  • The London Metals Exchange (LME) is one of the largest commodity exchanges in the world.
  • Futures and options contracts on metals such as gold, silver, zinc and copper are listed on the LME.
  • Hedgers and speculators are active on the metal exchange, with hedging operators turning to futures and options to mitigate risk and speculators seeking to make short-term profits by taking risks.
  • The LME represents the only commercial market for raw materials in Europe, as the trend is evolving steadily towards electronic commerce and is moving away from the outcry.

Understanding the LME

The LME is one of the main commodity markets in the world and allows the trading of options on metals and futures contracts. It also lists futures on its London Metal Exchange Index (LMEX), which is an index that tracks the prices of metals that trade on the stock exchange.

LME options and futures are standardized with regard to expiration dates and size. The expiration dates are structured so that traders can choose from daily, weekly and monthly contracts. Meanwhile, contracts are negotiated in sizes called lots, which range from 1 to 65 metric tonnes. The size of the lot will vary depending on the metal.

Market players on the LME generally seek to hedge the risk or take a risk. A hedger can be a producer or consumer and is looking for a position in a futures or options contract to protect themselves from future price movements in the metals market. On the other hand, traders and speculators buy or sell futures or options on metals to take advantage of short-term price movements.

Hong Kong Exchanges and Clearing has owned the London Metal Exchange since LME shareholders voted in July 2020 to approve the sale of the exchange. The trend towards consolidation has become common among the world’s stock exchanges to cut costs and as the stock exchanges fight to survive in a highly competitive world. For example, the CME Group acquired the New York Mercantile Exchange in 2008. NYMEX, in turn, had merged with the Comex commodities exchange in 1994, creating the largest physical commodity exchange at the time.

Types of trade in goods

The London Metal Exchange has three methods of trading metals: public outcry, via the LME Select electronic trading platform or by telephone systems. The nature of commodity exchanges is changing rapidly. The trend is moving towards electronic commerce and is moving away from the traditional outcry trade where traders meet face to face or in negotiation pits.

In July 2020, CME Group closed the NYMEX parquet floor. NYMEX was the last of its kind, but most of its energy and metal volumes went to computers. In a similar move a year earlier, CME closed a commodity trading floor in Chicago and ended a 167-year tradition of face-to-face support for e-commerce.

It is unclear how long the LME will be able to maintain its physical outcry negotiation model. It is the only physical commodity exchange in Europe. However, rapid advancement and acceptance of electronic commerce does not work in favor of the open outcry model.

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