FOCUS - LME, brokers, dealers and market gear up for UK EU vote zero-hour

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Martin Hayesmartin.hayes@fastmarkets.com+44 (0) 20 7337 2148

London 21/06/2016 - Brokers and traders on the the London Metal Exchange (LME), as well as the exchange itself, are getting ready for the decision and fallout from Thursday's UK EU referendum, which will decide whether the country remains a member of the 28-strong European Union (EU).

As the vote gets ever nearer, there has been a change in trading behaviour - many of the firms that populate the LME's open-outcry floor are lowering their risk profiles until this major hurdle of uncertainty has been passed.

"We just want to get these next few days out of the way now and then take a fresh look at the outlook. A lot of people - not just the trade but also the specs - are holding back until the vote is done and dusted," a senior floor trader said on Tuesday.

So while although there have been exceptions, the overall trend over the last week has been one of narrower price fluctuations. Intraday movements have been sparked by opportunistic day-traders latching on to varying opinion polls that swing between Leave  and Remain. This pattern will most likely be the norm until Thursday's vote is out of the way.

Thursday itself is expected to see brokers adopt an almost risk-free stance as the trading day ends. The LME's electronic platform, LMEselect, closes at 1900 local time while voting in the UK will continue until 2200, when polls close.

"The vote is too close to call so we have been told to be square on the close and come in on Friday and see what things look like," another trader at a RDM said.

Others were looking to their non-UK operations to manage the books where needed, initially in the US and then in Asia as Friday markets get into their swing and voting results become clearer throughout the European night and Asian morning.

"We have our Singapore office ready to go from the start - we will come in at 0730 and take it from there," a third floor trader said.

LMEselect will reopen on Friday at 0100. It is highly likely that indications of the referendum's outcome will be clearer, which could see a surge of business going through the system on the open - it will be early morning in Asia.

"We anticipate that there may be some increased volatility in our markets both before the referendum and once the implications of the result become apparent. Our existing systems and processes are robust, and we will ensure the existence of a fair and orderly market during times of market stress," LME head of media relations Miriam Heywood said.

Whatever the actual result of the referendum, Friday's trading session and the early part of next week have the potential for some significant price movements and bigger volumes, some traders said. Notable end-month business flows have been delayed this time.

"We are coming up to the end of the month, the second quarter and the first half of the year," the first trader said. "Ordinarily, we would be seeing activity ahead of this by now. But I get the feeling it is more pent-up and ready to go after Friday."

And if there is 'window-dressing' activity, position-protecting or option-related delta hedging price movements may not be as expected on Friday in the post-vote market.

A 'Leave' result would, in theory, underpin the dollar and weigh on commodities such as metals that are denominated in the US currency. But if long-term CTAs decide to close out large profitable short positions for the first half, this could negate downside pressure.

"Sometimes the contrarian view is the ideal trade - as long as the market is open and we don't get any nonsense of suspending business, like [UK Finance Minister George Osborne is] hinting about the UK stock exchange, we will take it as it comes," another veteran trader added.

 (Editing by Mark Shaw)



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