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What Is the London Metal Exchange (LME)?
Let me tell you about the London Metal Exchange, or LME—it's a commodities exchange focused on metals futures and options. This is the biggest exchange out there for options and futures on base metals like aluminum, zinc, lead, copper, and nickel, and it also handles precious metals such as gold and silver.
The LME operates out of London, England, but Hong Kong Exchanges and Clearing has owned it since 2012. The prices you see coming from the LME are the benchmark global prices for base metals.
Key Takeaways
You should know that the LME ranks as one of the world's largest commodities exchanges. It lists futures and options on metals including gold, silver, zinc, and copper for trading.
On this exchange, you'll find hedgers and speculators active—hedgers use futures and options to reduce risk, while speculators take on risk for short-term profits.
Importantly, the LME stands as Europe's only remaining physical commodities trading market, even as the industry shifts toward electronic trading and away from open outcry.
Understanding the London Metal Exchange (LME)
As one of the key commodities markets globally, the LME enables trading in metals options and futures. It also offers futures on its London Metal Exchange Index, or LMEX, which follows the prices of metals traded there.
The options and futures on the LME are standardized for expiration dates and sizes. You can pick from daily, weekly, or monthly expiration dates, and contracts come in lots ranging from 1 to 65 metric tons, depending on the metal.
Participants here are usually hedging risk or taking it on. If you're a producer or consumer, you might use a futures or options position to guard against future price changes in metals. Traders and speculators, however, buy or sell to capitalize on short-term price shifts.
History of the LME
The roots of the LME go back to 1571 with the opening of the Royal Exchange in London, where traders in metals and other commodities gathered. As Britain grew into a major metals exporter, European merchants joined in.
According to the LME's own history, the 'ring' tradition started in the early 18th century at the Jerusalem Coffee House, where a merchant would draw a circle in the sawdust and shout 'change!' to gather traders for bids and offers.
In 2012, Hong Kong Exchanges and Clearing acquired the LME. This fits the trend of exchange consolidations to cut costs and stay competitive—think of CME Group buying NYMEX in 2008, after NYMEX merged with Comex in 1994 to form the largest physical commodity exchange then.
Trading Metals on the LME
You can trade metals on the LME through three ways: open outcry, the LME Select electronic platform, or telephone systems. Commodity exchanges are evolving fast, moving toward electronic trading and leaving behind face-to-face open outcry.
For instance, in 2016, CME Group closed the NYMEX trading floor, with most volumes already on computers. A year earlier, they shut down Chicago's commodity floor, ending 167 years of in-person trading for electronic methods.
It's uncertain how long the LME can keep its physical open outcry going—it's Europe's last one, but electronic trading's rise isn't helping the old model.
LME and Ring Trading
Ring trading is how certain investments happen on the LME. Trading occurs in five-minute 'rings' inside a six-meter diameter circle, which is a type of trading pit. There are large boards showing current prices, and each ring-dealing member has a fixed seat, with an assistant behind to handle orders and customer updates.
Sessions are split by instrument—for example, steel trades from 11:40 am to 11:45 am and 1:10 pm to 1:15 pm GMT. The order goes steel, aluminum alloy, tin, premium aluminum, copper, lead, zinc, nickel, and cobalt.
Ring trading runs from 11:40 am to 5:00 pm, but inter-office telephone trading is available 24 hours. Check the LME website for the full schedule.
Example of LME
If you're an investor wanting to trade on the LME, you have three choices: the electronic LMEselect, the Ring, or the 24-hour telephone market. You must trade through an LME member—details on becoming one or finding certified members are on their website.
After picking your method and member, decide on the contract type and metal. The LME has seven contract types for its 14 metals: futures, options, TAPOs, Monthly Average Futures, LMEminis, Trade at Settlement, and HKEX London Minis.
Once decided, log into your brokerage account and start trading.
What Are LME Warehouse and Stock Reports?
The LME puts out various reports on its website, covering opening and closing stocks, stock movements, wait times, and canceled and live warrants for different locations and metals. Visit the LME site for the most recent ones.
How Do LME Warrants Work?
LME warrants are documents giving entitlement to a specific lot of LME-approved metal, also acting as insurance for owners. As of March 1, 2021, the LME went to digital-only warrants.
What Is the LME Official Settlement Price?
The LME Official Settlement Price is the final cash offer price used to settle all LME futures, published daily between 12:30 and 1:25 GMT.
The Bottom Line
While the CME Group and NYMEX are well-known U.S. commodity exchanges, the LME is Europe's sole remaining physical one. The COVID-19 pandemic brought challenges, but with history from 1571, you can count on the LME adapting to keep serving investors.
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