London 14/06/2016 - Lower first-quarter revenues at the London Metal Exchange (LME) were symptomatic of a downturn in the global economy and were not simply a reflection of higher fees or exchange dynamics, CEO Garry Jones said.
Revenue from its trading and commodities segment dropped 12 percent year-on-year in the first three months of this year, total revenue fell nine percent and daily volumes also dropped nine percent. Several market participants attributed the decline to higher fees, claiming these deterred participants from using the exchange.
An extreme view would be that increased fees were a factor for the decline but it was more correlated to the current economic environment, Jones said at LME Week Asia here on Tuesday.
"The real economy is what drives the market. We are a real economy exchange - the use of metals in the economy and the growth of the economy is the single biggest driver of supply and demand of our markets," he said.
And, while fees had increased, these have not made the LME more expensive to use than other exchanges, Jones said.
"This myth that the LME is more expensive even with the member-to-member and member-client trades is not true - we will stand by that… when people say fees were raised and they are now higher, the honest answer is that they were too low to start with. They were significantly lower [before] the takeover by HKEX because it was a member-owned organisation," he said.
On fears that the new membership and easier access to its trading platforms risks cannibalising current market participants' share of business, Jones said the LME was open for all - everybody who is allowed to trade can do so under regulatory requirements.
"The LME cannot deny people as members just because other people prefer it that we don't add other members to the system. Under the rules you have to maintain open access to trading. The only reason not to do so is financial credibility," Jones said.
Since the start of new exchange programmes to boost liquidity, the LME has had 300 new participants, of which 17 percent come from Asia and most of those are from China. None had previously traded on the LME, Jones said.
"People say we have introduced the financial market but at the same time the underlying volumes have gone down, therefore it is not working and shouldn't be done," he said.
"[But you] can't have it both ways - if it shouldn’t be done and it’s not working, you should be pleased. But actually what happened is the underlying volume is actually being held up by this increase in activity which wasn’t there before," Jones added.
Electronic LME client volumes are up 18 percent year-on-year while volumes on Select are flat.
TOM/NEXT DECLINE SYMPTOM OF WAREHOUSE RULES
Addressing speculation that higher feeds caused a reduction in 'Tom'/next liquidity, Jones said this spread was highly correlated in the shape of the yield curve - be it contango or backwardation.
It is also reflects warehouse inventories, particularly in aluminium, which has seen the biggest drop in 'Tom'/next activity.
"We have bought in warehouse reform to reduce stocks in warehouses, to reduce the positions which shouldn’t be there anyway, which created the queue," Jones said.
"Again, there's a high correlation. So I would say that the 'Tom'/next volumes are a percentage for warehouse stocks, a percentage for the actual type of trading and a percentage, of course, of the fees - if its free,you are going to get higher volumes," he added.
Copper, for example, has so far in June seen more activity than at any point in 2015.
"If it is all about fees, how can that possibly be true? It has to be the amount of stocks, the amount of trading and everything else," he said.
The LME remains very much a physical market - this sector accounts for as much as 40 percent while proprietary trading accounts for around just 15 percent, he added.
(Editing by Mark Shaw)