What is the London Metal Exchange – and who dominates its trading?
The London Metal Exchange (LME) is currently in the news. Like London’s fledging and failed PLUS stock exchange, it’s “up for sale”.¬†Whoever buys the LME will likely not seek to substantially change its modus operandi. And – as with PLUS – existing shareholders will have to agree to any sale.
It’s commonly believed that the LME warehouses of physical metals is what keeps its trading system sound. Possession of these stocks preserves a balance between supply and demand. In order to protect the interests of producers and consumers from sudden rises or fall in price, the LME itself may release some of these stocks into the market.
In fact, only a small proportion of warehouse stocks are used for this purpose. Known as “a market of last resort”, the mechanism has become used for only a relatively small number of instances. Otherwise, most of what is held in the LME warehouses are employed for hedging, so as to underpin its futures and options contracts.
Just last week, however, the manner in which an LME Category 5 client, Glencore, is exploiting LME warehouses for its own ends, has come under scrutiny.
See http://www.minesandcommunities.org/article.php?a=11727.