EDITOR'S NOTE: When the London Metal Exchange (LME) began offering gold derivatives contracts five years ago, traders cheered, not only because London was a major center for gold trading, but also because it would establish a counterbalance to the COMEX. After all, the LME is the world’s largest exchange for industrial metals; a proven reputation that would transfer well over to the precious metals category. Perhaps one of the worst things that can happen to a newcomer in this industry, even a “mature” one, is to give traders doubt about its reliability. And that happened last month with the LME’s nickel short squeeze. Lack of transparency and suspicions of market manipulation, whether illicit or inadvertent, evidenced or unfounded, might be enough to harm an exchange’s reputation. This is a painful lesson that the LME just learned. And it’s enough to cause the exchange to cease trading in precious metals derivatives trading, even in the most nascent stages of its emergence.
(Bloomberg) -- The London Metal Exchange will abandon its attempt to break into precious-metal trading after just five years.
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The LME -- the world’s biggest exchange for industrial metals -- partnered with banks including Goldman Sachs Group Inc and Morgan Stanley in 2017 to launch the contracts. London is one of the two major centers of precious-metals trading, where trillions of dollars in gold, silver and associated derivatives change hands each year. It’s an almost entirely over-the-counter business, dominated by top bullion banks like JPMorgan Chase & Co. and HSBC Holdings.
The LME’s project sought to move the trade onto an exchange comparable to the Comex in New York, providing more transparency over pricing. Initially it met with some success, but volumes dropped steeply after Societe Generale SA -- one of the LME’s original partners -- closed most of its commodity trading business in 2019.
The decision will come as little surprise to the market, given the contracts haven’t traded since 2020. But it’s a painful reminder of other issues facing the LME.
The bourse was criticized by investors and traders for its handling of the nickel short squeeze last month, when it suspended the market and canceled trades after an unprecedented surge in prices.
Nickel trading on the LME is yet to recover. Weekly volumes on the exchange’s benchmark three-month contract have dropped sharply to the lowest in over a decade.
In precious metals, there is still pressure to move London’s trade in a more transparent direction. In November, the FICC Markets Standards Board, a working group of investors and banks, recommended greater use of central-limit order books and central counterparties, which are common to exchanges.
Other members of the LMEPrecious consortium included ICBC Standard Bank Plc, Natixis SA, proprietary trader OSTC Ltd. and the World Gold Council industry group.
The LMEprecious service is expected to be withdrawn on or about July 11, the exchange said in a notice to members. It took the decision “following discussions with market participants, and in light of the low levels of trading activity within the LMEprecious market.”
At the height of its popularity, over 3 million ounces of gold traded each week through the LME’s main contract. That’s dwarfed by the over ten million ounces a day that typically trade on the OTC spot market, according to data from London Bullion Market Association.
(Updates with additional background on contracts.)
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