London 11/07/2016 - Market participants are at odds over the reasons why volumes on the London Metal Exchange (LME) fell 7.8 percent in the first half.
While some attributed the decline mostly to fee increases that have made trading in the exchange less attractive, others - including the exchange itself - said it reflected a general downturn in the physical trading environment.
"Volumes naturally fluctuate for many reasons, including macroeconomic factors. Historically low prices have led to lower hedging activity from the physical industry, which is a significant constituency of the LME market," a LME representative told FastMarkets.
Still, trading volumes on rival exchanges have risen - on the CME, for example, Comex copper futures and options average daily volume in June was rose 31 percent to 98,000 lots - although it is still well below the LME's 186,536 lots in the same period.
As well, open interest in its financially settled aluminium contracts surpassed one million tonnes earlier this month and its aluminium premium contracts have traded while the LME's version has yet to do so.
For the LME to match its 2015 full-year volume - itself down four percent on the 2014 total at 169,557,846 lots - it would now need to trade at least 15 million lots per month for the rest of the year.
But an increase in business of this or any magnitude is unlikely unless the exchange alters its current fee structure, some traders warned.
When Hong Kong Exchanges & Clearing (HKEX) purchased the LME in 2012, it promised to keep fees unchanged until 2015. Unsurprisingly, traders warned that higher fees would hurt business and push trade to rival platforms when HKEX overhauled its fee structure last year.
Higher fees and the lower business levels go hand in hand, some market participants said.
"Some said [complaints about fee increases] was just us being bitter. They said 'you sold the exchange for a lot of money and now you are complaining' but it not just the members who are unhappy - it is [also] the clients. They're the ones who end up paying the cost and ultimately they are the ones who are looking elsewhere," a category one member said.
"With the increase in fees, brokers are now running smaller books - and this has a dampening effect," a broker said.
As well, the cost of short-dated carry trades and the Tom/Next spreads is a major factor - while these did not typically incur fees, some members are now charging at least $1 per side.
"For some companies the 'Tom'/next trade made up a large proportion of their business model. The extra costs here have made it impossible and so it is not surprising that there has been a decline in volume," the category one trader added.
But while fees had increased, these have not made the LME more expensive to use than other exchanges, LME CEO Garry Jones said during LME Week Asia
"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," he said.
Comparing LME and CME fees is difficult because of the different contract sizes in the likes of copper while in aluminium, where the tonnages are the same, incentives distort the picture.
"The CME has a different user base. Of course people trade on both but fundamentally they are different," a market source said. "Comparing the liquid global aluminium contract of the LME with an illiquid one on CME is not quite comparing like for like - for a fledgling contract you would of course incentivise trading with lower fees."
Still, HKEX is considering a re-evaluation of trading fees because some of them have had "unintended consequences", CEO Charles Li conceded at LME Week Asia.
As well as volumes, open interest (OI) was also down for the last trading day of the month apart from in zinc.
Across the complex, 13,737,401 lots were traded against the corresponding period's 14,375,910 lots. Aluminium has failed to get above one million since March this year, having previously held above this level since at least the start of 2014.
The LME is courting new participants that are predominantly HFT and algorithmic traders, which has affected OI, some market participants claimed, although others said increased activity in the three-month dates reflects well on the LME's new liquidity programme, which shows business is not being diluted.
(Editing by Mark Shaw)