London 26/05/2016 - The LME's latest initiative to provide cheaper, direct access to Select, its electronic trading platform, has worried exchange members who claim they will be increasingly bypassed.
Industrial users also fear that the exchange's attempts to bolster the monthly dates will take away liquidity from the unique prompt date structure.
Last week the exchange announced an electronic trader programme for all of its members' clients from June 1, with reduced fees as an incentive.
The measure is part of the LME's liquidity programme to boost participation under which it will reward clients for their "willingness to participate in the LME's goal of further building liquidity on monthly dates", it said in a release.
The exchange has made no secret of the fact that it wants to attract more business and in particular build volumes in proprietary and algo trading; these trades make up only a small proportion of its business at present.
Physical market hedging has declined in the past year due to "uncertainty in the direction of commodity prices", LME head of sales Paul MacGregor said in a presentation earlier this month.
"Hence our growth in volume in 2015/2016 has been from financial players who only interact with electronic markets, and broadly (but not exclusively) wish to trade standard monthly standard monthly futures," he added.
But several market participants disagreed with this interpretation, blaming a decline in the LME's first-quarter volumes on increased trading fees.
In its financial results, LME parent HKEX attributed reduced trading fee revenue to fewer trading days and rebates for trading initiatives.
Again, market participants disputed this analysis, pointing out that the difference in trading days was negligible and that volumes should have increased since the rebates were intended to drive volumes.
Still, no one should be surprised that the exchange would look to boost liquidity and that those might have wanted to trade the LME but had been put off by the prompt date structure or costs will welcome the new measures.
But they have reignited the disagreement between the LME and some of its members who argue that they are not just frustrated over technical measures but are more concerned about who the exchange is for and how it should operate.
"It is understandable that the exchange wants to make access easier but a lot of new measures are at the detriment to the original manifesto and that is causing some frustration," a Category One member said.
"A lot of traders are down in the dumps. The focus on the monthly dates and cheaper access only goes to add to the sense of disillusionment," he added.
The traditional trading fraternity fear they will now be used more for clearing clients than for trading for them, exposing themselves to risk on their behalf but without reaping the benefits.
"They are trying to get volume on the three-month but are going about it by bypassing the members. They keep ploughing this field and it is making it harder and harder for the members," a second category one source said.
As well as offering rebates on outright Third-Wednesday trades and third Wednesday to/from three-month spread trades to client members, they are under no obligation to make markets and there is no minimum volume thresholds required to receive the full rebates.
"If you are getting the same benefits as a members and being rebated to trade, why would you bother using a member?" a third LME trading source said.
This is not the first time the LME has faced criticism for attempting to boost liquidity - when it announced its monthly prompt date initiatives, industrial users and member companies were up in arms, warning the exchange risked losing its physical roots.
Exchange users who are acclimatised to its unique prompt-date structure fear that attempts to promote outright monthly contracts would not provide fresh liquidity but would merely shift it away from three-month business.
Apurv Bagri, president and CEO of Metdist Group and now a member of the HKEX board, warned in a speech at LME Week in 2014 against killing the golden goose.
"If, over time, the LME is reshaped into a look-alike American-style exchange, then the very barriers that have prevented competition will dissipate, and lead to the erosion of our dominant position. If we give up or dilute our historic links to the physical trading community, then our uniqueness will disappear and our ability to create value will be dissipated," he said.
But the exchange has stressed repeatedly since then that it would not change its physical roots or prompt date structure.
"Physical users want to hedge the exact date and we have no intention of changing that," MacGregor said.
(Editing by Mark Shaw)