London 06/06/2016 - Metal brokers have gone back to the past to review the possibility of setting up an alternative futures trading platform to the London Metal Exchange (LME).
There is growing frustration about the rising costs of trading on the LME, which members have publically stated are making it increasingly tough to do business.
"There is certainly more dissatisfaction with the LME and its fee structure and general attitude than I can ever recall. Much of this is focused solely on the fee structure, which is forcing members to pass on many more if not all of the costs to clients," Malcolm Freeman at Kingdom Futures said.
"Added to this the cost of credit due to regulatory capital requirements/cost of capital and it seems to many clients that alternatives to the LME will have to be sought," he added.
The new platform could see the return of a re-mutualised exchange to the metal market - one that would be funded and backed by the metals community and one whose DNA is not dissimilar to the original LME.
To date, it has the backing of several members - some of which are high-profile LME Category One members - with several others in the pipeline. The focus group set up to explore if there is appetite for it includes former LME CEO Martin Abbott.
"[Today's news] is certainly something the LME must react to - it will be very interesting to see what they counter with," a Category One trader said.
Amid fierce competition for volume and customers at a challenging time of slowing global growth, the LME, CME and the SHFE are determined to grow business from the proprietary/algorithmic and fund and financial sectors.
The LME, for example, is looking to boost customer numbers via its new monthly prompt and third Wednesday contracts, offering incentives for all LME member clients that transact on Select.
But some LME members fear that this pursuit of new blood puts the old school at risk of becoming obsolete.
"Members are frustrated as they are being bypassed on the LME in the new products, and are becoming increasingly used only for clearing the trades," a second LME Category One trader said.
And despite assurances that the LME will not become another 'American-style' exchange, they also fear that the LME's unique prompt date structure is at risk.
"Fees are not the only factor - there is a sense that the market may lose some of its trade roots," an industry source said.
The backers believe this provides an opportunity for a new trading venue that has one foot in the past and another in the future
With several high-profile LME members taking stakes, there is potential for decent volume and liquidity from the start. But the project is not without its risks and is still in very early stages of development - its future rests in the hands of the metal brokers and whether they are prepared to pay to get things off the ground.
But should the LME respond by lowering fees, the need for a new platform might be negated altogether, several sources said.
The LME declined to comment.
As a long-standing institution that, crucially, also provides the global reference price for metals and whose owner has deep pockets and wants more business to go through its platforms, the LME's reponse is likely to be robust.
As well, the new project is also battling precedent. This is not the first time that the LME has faced a challenge from rivals outside the established North American and Chinese exchanges - in 2001, it was forced to establish Select to combat the online platform that was launched by inter-dealer broker Spectron in the previous year.
Based on an existing energy trading model, it was a no-frills system for three-month business that cost an estimated 100,000 pounds to set up. It quickly gained traction because of its advanced technology and reasonable fees but over the years its market share dwindled while liquidity and volume on LME Select increased.
Also in 2000, at the height of the late-1990s dotcom boom, Emetra, an online physical metals trading platform that was a joint venture between metals merchant MG, Internet Capital Group and Safeguard International Fund, was launched. It closed in 2002 after trading around 150,000 tonnes of metal - turnover that was again dwarfed by the LME.
(Editing by Mark Shaw)