Proposed changes to the London Metal Exchange's market structure may actually have the opposite effect to its desired intention: destroying liquidity, not increasing it.
Attention has been focused on the
proposed permanent closure of the LME ring, the incentivization of electronic trade and changes to margin methodology, which were central issues in the exchange's recently closed discussion paper.
But less attention has been given to how physical users might change their use of the exchange, and the news is not good.
The bottom line: There is a very real risk that a sizable portion of the discretionary business that passes through the LME will be eliminated entirely or move to the over-the-counter (OTC) market. Hedging is often required due to commercial and even production-related practices that can be altered.
It is a very real threat, according to the Metals Risk Team, the price risk management advisory group run by Michael Lockwood, David Waite and Robert Fig.
"The LME must consider that a fair bit of physically derived trading volume comes...