In the face of falling trading volumes, the London Metal Exchange has cut certain trading fees by 44% and introduced several structural changes designed to lower customers’ trading costs.
The rollback marks a sharp about-face by the exchange’s owner, Hong Kong Exchanges & Clearing. HKEX bought LME in 2012 and raised the fees in 2015, citing a need to fund infrastructure expansion. However, the price hike didn’t work out entirely as planned. Amid complaints from member firms, volumes fell by 4.3% in 2015 and another 9% in the first half of this year.
LME is still the dominant exchange for futures on copper, aluminum and other industrial metals, but it faces increasing competition from both East and West. The Shanghai Futures Exchange has become one of the largest commodity futures exchanges in the world, and in New York, the Comex division of CME Group is working hard to capture a bigger share of the market.
An in-depth look at the volume in copper futures at these three trading centers shows the trend. After adjusting for the difference in contract sizes, LME's copper contract has moved from 72% of combined volume at the end of 2012 to 62% in the second quarter of 2016. SHFE rose from 13% to 23% of the market, while Comex held steady at 15% of the market.
After talking it over with members and other market participants for several months, LME decided on a package of measures designed to strengthen its metals markets and reinforce the value of the exchange for physical users of the metal.
One dimension is to lower the cost of trading. The 44% fee reduction is targeted at a particular type of trading known as short-dated carries. These trades allow market participants to roll positions from day to day, which the exchange views as particularly important for industrial users. The exchange has cut the member fee for this type of trade to 50 cents per side, including clearing and trading. This brings it to the same level paid by clients and is actually lower than the 58 cents the exchange was charging before the 2015 hike.
The LME also plans to cap charges for position transfers to $10,000, well below the $30,000 average in 2015. This will apply to both members and clients.
Another dimension is in the area of margining. LME Clear plans to reduce the initial margin payable for LME positions by using a new margining methodology. This methodology is currently undergoing regulatory review, but the exchange expects that it will be particularly effective at reducing initial margin for aluminum and copper.
But will these discounts be enough to lure back traders who have defected to other platforms? LME executives are cautiously optimistic, noting that the measures were discussed with members over the last few months. “We are confident that members will see the benefit from the changes we have introduced,” said an LME spokesperson.
