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NOTICE FROM LME (extracted from LME web site)
CLOSURE OF EXCHANGE - HOLIDAYS 2002
At a recent meeting, the board of directors resolved that during 2002 the Exchange will close on the following holidays:
UK New Year’s Day
Holiday, Tue 1 Jan(Substituted 3-month prompt date,
Wed 2 Jan)
Good Friday, Fri 29 Mac
Easter Monday, Mon 1 Apr
May Day, Mon 6 May (Substituted 3-month prompt date, Tues
7 May)
The Queens Golden Jubliee ,Mon
3 Jun
UK Spring Holiday, Tue 4 Jun (Substituted 3-month prompt date,
Wed 5 Jun)
UK Late Summer Holiday, Mon 26 Aug
Christmas Day, Wed 25 Dec (Substituted 3-month prompt date,
Mon 30 Dec)
Boxing Day,Thu 26 Dec (Substituted 3-month prompt date,
Mon 30 Dec)
Extra Christmas Holiday Fri 27 Dec (Substituted 3-month prompt date, Mon 30 Dec)
On Tuesday 24 Dec, the Exchange will close
after morning kerb(13:30).
Key Points About The London Metal Exchange
1. The LME is the world’s largest non-ferrous metals exchange.
2. Its three main
functions are:-
i. to provide a daily price for its metals which are relied upon worldwide by
industry;
ii. to provide futures and traded options contracts that allow for prices to be
locked in (this risk management function is known as hedging);
iii. and to act as a deliverer of last resort by authorising warehouses to store
approved brands of metal. All contracts assume physical delivery but most are
usually closed out before they become due - this being the 'insurance' aspect of
LME contracts.
3. The use of daily "prompt dates" is an important difference between the LME and other futures exchanges. It is more commonly seen as a feature of 'over-the-counter', bilateral forward markets like the foreign exchange markets. It means that the Exchange combines the convenience, for trade users especially, of settlement dates tailored to suit individual needs with the security of a clearing house. After the 3-month date, the daily prompts for forward trading are reduced to weekly and then monthly contracts, out to 15 or 27 months forward.
4. The daily value of contracts traded on the LME is about $10,000 million. For the third year in succession, the LME has seen record volumes with levels in 2000 up 8% on 1999. During that period, 66.4 million lots were traded which equates to an annual turnover of about $2.5 thousand billion. Volume of business has increased ten fold in the last decade.
5. A report by BI (formerly British Invisibles) in June 1999 estimated that the LME was responsible for invisible earnings of about £250 million a year.
6. The LME trades futures and options contracts in aluminium, aluminium alloy (2 contracts), copper grade A, zinc, tin, primary nickel and standard lead. It also trades traded average price contracts (TAPOs) for aluminium and copper grade A, aluminium alloy, standard lead, primary nickel, tin and zinc. The Exchange introduced futures and options contracts based on an index (LMEX) of its six primary metals in April 2000.
7. Last year the LME launched an electronic trading system, LME Select. LME Select is a member to member trading system where LME exchange contracts are traded and matched on a principal to principal basis. The LME Select screen is accessible only to LME broker clearing members but a huge amount of information about trading on LME Select is available in real time to all market users through the 45 or so information vendors who distribute LME data.
8. LME trading is conducted on LME Select and by open outcry on the trading floor, supported by a 24-hour inter-office telephone market. The first session of open outcry (ring) begins at 11:40am where each contract trades for a five minute period. This is followed by the second ring which gives rise to the day's official prices, and then the 'kerb' when all eight contracts and LMEX trade simultaneously. The second floor trading session begins at 15:10 and follows the structure of the first session.
9. The Exchange is a Recognised Investment Exchange (RIE). The chairman is the Lord Bagri CBE, the chief executive is Mr Simon Heale and the executive director; regulation and compliance is a former official of Her Majesty's Treasury, Mr Alan Whiting.
10. The Exchange approves, but does not own, more than 400 warehouses in 11 countries.
11. More than 440 brands of metal from 65 countries are approved as ‘good delivery’ against LME contracts.
12. The London Metal Exchange Limited, which owns and operates the Exchange, is a wholly owned subsidiary of LME Holdings Limited.
13. Transparency of the market is very high with over 50 specific data sets issued throughout the trading day by more than 50 price vendors across the world.
Should you have any media related questions or require further information, please contact the LME’s press office on +44 (0) 20 7264 5555.
A GUIDE TO THE STRUCTURE AND MARKET
TERMINOLOGY OF THE LONDON METAL EXCHANGE
INTRODUCTION AND PURPOSE
This document is designed to provide customers of the London Metal Exchange (LME) with an overview of the structure of the LME, market terminology, and a guide to how its members execute orders. It is not a comprehensive trading guide, nor a complete guide to market terminology. Customers should always ensure that their requirements are explained in detail to the member responsible for order execution.
THE LME
Principal Nature
There are two types of contracts traded on the LME - Exchange Contracts and Client Contracts. Exchange Contracts are contracts between clearing members of the LME. Client Contracts are contracts between customers and ring dealing members (RDM), or associate broker clearing members (ABCM), or associate broker members (ABM)1 . Only RDMs, ABCMs and ABMs may issue Client Contracts.
Statements that they issue to clients must state clearly ‘THIS IS AN LME REGISTERED CLIENT CONTRACT’. Contract criteria pertaining to LME contracts, including metal specification, acceptable currencies, prompt dates, option strike prices etc are detailed in the LME rulebook and appropriate notices.
Exchange Contracts are traded between members, matched in the LME matching and clearing system (LMEMS) and margined by the London Clearing House (LCH). Client Contracts are registered at the LCH but margining arrangements are left to members to agree with their customers (subject to LME rules).
1
For the purposes of this document these categories of members will be referred to as LMEmembers, members or by the appropriate abbreviation.
All LME contracts are between parties acting as principals. This
prevents any party entering into an LME Contract as agent for someone else but does not prevent an agent effecting a contract between two
parties if the resulting LME contract is between disclosed parties, each acting as a principal. It is an essential requirement of an LME Client
Contract that one party must be an RDM, ABCM or ABM. A list of members is available from the LME. A principal relationship does not
mean that members do not take on quasi-fiduciary responsibilities when they effect trades for customers. In particular, if a member undertakes
to deliver a particular service, for example deal a specific number of lots ‘in the Ring’ (see below), then it should take care to ensure that it
complies with all the terms of such a transaction. In respect of Exchange Contracts, an LME broker buying metal under
an Exchange Contract from another LME broker cannot do so as agent for his customer. Where an LME broker buys metal under an Exchange
Contract with a view to selling that metal to his customer, this is achieved by entering into a back-to-back Client Contract with the
customer. Brokers and customers can agree the conditions that apply to their Client Contracts. For example, a customer may make it a
condition of his Client Contract that the broker must enter into a
back-to-back Exchange Contract for the metal being bought or sold. This does not make the customer a party to the Exchange Contract but does
create additional duties and obligations owed by the broker under the Client Contract.
Customers should be clear about conditions that apply to their Client Contracts and about the obligations and duties that the broker owes as a result of those conditions. Brokers should be clear about the duties and obligations they owe as aresult of conditions attaching to their Client Contracts. They should also be clear about the duties they owe to their customers under the SFA’s conduct of business rules.
Dual Capacity
LME members may act both in the capacity of market maker and broker. They may act in a particular manner depending on a number of circumstances, including the size of the order, the liquidity of the market at the time the order was placed, and, not least, the customer’s instructions. Customer orders may be filled directly from a member’s ‘book’ or filled by the member after it has bought/sold metal in the LME market. Furthermore, customer orders may be offset, amalgamated, broken-up or netted for execution. These methodologies apply equally to orders whether any resulting exchange contract is effected in the ring, in the inter-office market, or on LME Select.
Customers with specific order requirements must make these known to the member at the time the order is placed. Customers wishing to know how their order was executed should request such information from the member.
Trading on the LME
Trading takes place on the LME by open outcry in the rings and kerbs, between members in the inter-office, and over the Exchange’s electronic trading system LME Select.
Open Outcry
Historically, during ring and kerb sessions, the majority of customer business reflects prices traded in the open outcry sessions. Customers can follow the market activity by monitoring quoted and traded prices disseminated via the LME market data system (MDS), or by listening to the simultaneous floor commentary provided by member(s). The MDS publishes prices traded during ring and kerb times on price vendor information services such as Reuters.
Members can continue to ‘make a market’ on request to a customer whilst the ring and kerb sessions are in operation, although this is entirely at the member’s discretion. Alternatively, the customer can decide whether to place an order using the ‘order styles’ mentioned below.
Inter-office
Inter-office trading is conducted between members by telephone or by electronic means. On contacting an LME member, customers will usually be provided, on request, with the member’s current bid-ask quote. The customer may trade on this quote, or call another member in an attempt to improve the quote, or wait and monitor prices on the LME market data system, or leave an order with a member. If an order is left with a member for execution and not taken on its own book, it may be executed via a ‘back to back’ Exchange Contract agreed via a telephone deal with another member or executed via an electronic trading system.
LME Select
LME Select allows members to trade all LME Metal Contracts, Index Contracts, Exchange Metal Options or Traded Average Price Option contracts, for all prompt dates and carries, and for all series. All trading on LME Select is in US dollars.
LME Select replaces neither inter-office trading nor trading in the ring.
Depending on the time of day, it is possible for members to deal by telephone or electronically in the inter-office market, by LME Select, or in the rings. Customers should specify which mechanism they prefer where they have a preference.
Firm prices of the best bid and offer available on LME Select, the total volumes available at these prices, and the price and volume of each trade transacted are distributed to and displayed in real time by information vendors. Only LME Select prices are displayed, not those of other third party electronic trading system providing LME prices. Only RDMs and ABCMs are eligible to become LME Select Participants and to have direct access to the system. Customers may effect ‘back to back’ client contracts based upon prices available on LME Select via such members.
ORDER STYLES
Ring
Customer orders are not traded in the rings or kerbs, so an order using the term ‘in/on/during the ring/kerb’ will be executed on the basis of the prices traded/quoted during the particular session. If a customer requires their order to be ‘shown’ or traded across the ring/kerb then they should make this requirement known to their executor, who may or may not accept this as a term of the order. The equivalent Exchange Contract for a customer order may not replicate its terms. As the customer is not a party to any Exchange Contracts i.e. those traded in open outcry between members in the ring/kerb sessions, in specifying ring/kerb, the customer is merely identifying a pricing mechanism. A member which undertakes to match a price traded in the ring/kerb is not necessarily undertaking that it will trade during that ring/kerb, only that it may do so. However, a customer may place an order with the specific request that the member trades an Exchange Contract replicating its order in the ring. In such circumstance the RDM can only trade this order by open outcry in the ring.
If a customer trades at the prevailing market quote proffered in the ring/kerb, their executor is not necessarily obliged to effect an Exchange Contract at the same price. This can lead to situations where the customer has traded at the prevailing market quote, without that same price trading in open outcry across the floor of the Exchange. However, if the instructions from the customer are to achieve a specific price i.e. close of ring 2, then this is the price that should be given, if that specific order is accepted.
Market
In normal circumstances a market order is one executed on a timely basis at the prevailing market price. As mentioned above, at certain times of the business day, trading is taking place simultaneously in the ring or kerb, on LME Select, and in the inter-office market. Traditionally, when open outcry trading is in course, the market is defined by activity within the ring/kerb. At other times, the market is split between inter-office trading and trading on LME Select. During inter-office sessions, indicative quotes are available on the MDS and firm prices available on LME Select and the LME Select page on information vendors’ systems.
The indicative prices might not be available to all parties.
Best
Order styles on the LME using the word ‘best’ confer some discretion upon the members when executing the order, requiring them to use their ‘best endeavours’ on the customer’s behalf. The extent of the discretion is fixed by the terms of the order. This type of order is distinct from ‘best execution’ as defined by the FSA, which most non-private LME customers waive as part of their overall agreement with their executor.
Best orders may be executed both in rings/kerbs, inter-office and on LME Select. Inter-office trades rely upon the members’ skill in determining the level of the market at any particular time. Best orders received during ring/kerb times may not result in the customer receiving the ‘best’ price achieved during the session if the price improves after the member has booked the metal intended to fill the order. At any given time, the best price on LME Select will be displayed on the system and by the information vendors. Customers should be aware that depending on market conduct the best price may move during the period from them placing their order and the members executing.
Close
Most orders placed ‘on the close’ are for either the close of the second ring (official LME prices) or the second kerb (closing prices). Both these prices are demonstrable because of the publication of official and closing prices. Closing prices of other sessions are harder to determine, although the LME does also publish unofficial prices which are established at the close of the fourth ring. In all circumstances, customers and members need to agree the style of execution i.e. bid/ask, mean or traded price. Members may not always be able to guarantee execution (price or volume) due to prevailing market conditions. A closing price on LME Select is the last price traded before the system closes at 19:30.
Open
Customers placing orders to trade on the opening of a market session must provide clear instructions to the LME member which indicate how this order should be activated i.e. basis the opening bid/ask or basis the first trade in the session. Customers will also need to inform their executor of their requirements if the executor is unable to fill the order basis the ‘opening’ price in its entirety due to market constraints such as insufficient supply/demand. Customers may place orders with members for LME Select that can be placed into the system for activation when the market opens at 07:30.
Resting Orders
When placing resting orders such as ‘good’ til cancelled’ (‘GTC’, or any derivations thereof) or stop loss orders, customers should ensure that they are in agreement with their executor’s definition of the ‘trigger’ point of the order. Usually, this is interpreted as being the point when the order price is seen to be trading in the market, but it is possible to request the order be activated when the order level is either bid or asked as appropriate, via the prevailing market quote. Stop loss orders become market orders when a trade, or a bid or an offer triggers the stop, with members then executing the order at the current market price.
It is possible for a customer not to receive a ‘fill’ on a resting order despite the ‘trigger’ point being ‘touched’. This could be due to a number of circumstances such as order priority, illiquidity, prevailing market conditions etc. Whatever the reason, the executor should be able to provide the customer with a full explanation of why it was unable to fill the order.
Customers should be aware that resting orders might be activated during periods of illiquidity in the market. As previously mentioned this could result in the trade not being filled. For ‘stop’ orders this could result in a worse fill than anticipated (‘slippage’). Customers should ensure the executor is fully aware of their requirements regarding theexecution and adheres to any limitations, especially if the customer is not in contact with the market/member when the trigger point is reached.
It is possible for customers to ask members to place resting orders in LME Select. The system accepts GTC and Good for Day (DAY) orders. DAY orders are automatically deleted from the system at 19:30.
Conclusion
The above order styles do not represent all possible methods of order execution on the LME. Members and customers should ensure that orders are communicated in meaningful terms that deliver the required execution in accordance with LME rules.
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