ANALYSIS: LME tech upgrade to boost screen trading credentials

The LME is set to launch on March 24 version 10 of its main electronic trading platform LMEselect, after publishing last week rules for the certification of algorithms and direct market access under the new technology.

The Hong Kong Exchanges and Clearing-owned venue has said the "all-new trading platform" is designed to offer clients enhanced order functionality; premium-quoted options including market-maker protections; and custom strategies.

For Marc Bailey, the chief executive officer at Sucden Financial, a Category one LME member, the technology work is central to the exchange’s broader ambitions to reform its procedures.

“The challenge for them is that all of these reforms are reliant on technology which they still have to deliver. The inability of the exchange to modernise its technology stack remains a source of frustration. We would like to see a better technology offering from the LME,” said Bailey.

The new version of LMEselect is being built inhouse, drawing on HKEX's cash equity trading systems and Trading Technologies as the supplier of the client interface.

Bailey said stronger technology should support the LME options market which has huge potential. “If you look at options, it’s going to be years, not months, before we have price transparency on screen, whereas Comex is starting to offer more options on copper and aluminium.”

CME Group’s Commodity Exchange (COMEX) has aluminium and copper futures and options which compete with those available on the London market.

The LME’s copper and aluminium futures markets are larger than the CME’s, according to FOW Data, but the US group’s main copper options contract reported volume up 112% last year to 2.9 million lots while LME’s main copper options product traded 2.6 million lots last year, an increase of 25.7% on 2023.

The LME dominates aluminium options, trading 3.3 million lots last year, which was up 24% on 2023 while COMEX’s aluminium options market is far-smaller at 53,700 lots traded in 2024 but this was up 243% on the previous year, according to FOW Data.

The LME tech upgrade is the latest step in the exchange’s multi-year effort to attract more flow from hedge funds and market-makers that use trading algorithms to manage their interactions with the exchange’s products.

A milestone in this evolution was the extension in the first quarter of last year of the LME’s volume-weighted average price (VWAP) methodology to calculate the closing price for the group’s most liquid contracts. Previously the closing price was drawn from the LME’s open outcry ring.

The change, which followed a consultation paper launched in May 2023, was not universally popular with the LME’s traditional members.

Bailey said: “We still think that the people who participate in the VWAP auctions are at the mercy of the algorithms and the trade market’s view is unchanged on that. The exchange received direct feedback from trade associations, which raised concerns about the whitepaper's impact on their businesses. They don’t want financial players and algorithms interfering with their order flow.”

Bailey said SucDen has adapted to the new VWAP closing price methodology so the broker continues to book-build around market-close, adding: “The impact to us has been modest but we still believe the algorithms are making it more expensive to hedge.”

The group’s multi-year modernisation push has inevitably fuelled speculation about the long-term prospects for the LME’s famous open outcry trading ring, the last of its kind in London.

But, again, there are different views on this. Ed Meir, a senior base metals analyst at Marex, also a Category one, ring-dealing member of the LME, said: “I like the way the LME originally was structured. It was a physical marketplace and the ring catered to that.”

He added: “In the last 10-15 years, the LME has wanted to attract more trading (and revenues) from the funds and algos and so they have reduced dependence on the ring considerably, but not completely due to member backlash. It is a delicate balancing act, but I for one hope the ring stays in place.”