London 27/01/2016 - The cost of doing business on the London Metal Exchange has forced LME brokers to pass costs onto customers, with further increases likely, brokers warned.
The LME introduced in January last year a new fee structure including an all-in rate that, in some instances, saw increases of 97 percent.
And while the exchange has kept its fees for 2016 unchanged, a year of trading at 2015 levels has proved too costly for some brokers, which have warned customers that they will have to pass the buck.
"Some brokers had subsidised part of the fees last year for customers but the bill came through and it was quite a shock to see how much they were giving away," a category one trader said. "It's not just trading fees but execution fees too."
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.
"I've been told that from March 'Tom'/next fees will be $1 per lot per side - that's going to cost us $15,000 a month extra at least. There was no charge before," a cat two bank said. "The goalpost is forever moving and it never seems to be moving in the direction of more business."
According to the cat one trader, a Tom/next trade including clearing, crossing and execution for a category two would total $3.80 if carried out in the ring.
"The numbers talked about are small but you start to add that up and you are looking at seven figures over a period of time - and in this market no one can ignore that. We are under pressure to keep our operating margin profits," a second cat one trader said.
Indeed, cat one brokers have not taken the changes lightly given the threat of a loss of custom. But an increasingly costly environment amid the global downturn in metals demand and the funds' retreat from the sector have left them with few options.
"At the moment it is not a company-wide rule for us but some [brokers] may be passing it on and that is the way things are heading," the second cat one trader said.
"It is not like the old days when there was an unwritten rule that you do not pass the fees on; in this environment brokerages can no longer swallow the ever-increasing costs," he added.
Amid low margins and high costs, it will prove increasingly difficult not to pass on costs despite the risk of losing business, a third said.
"If you are a struggling LME broker and you are operating at margins to keep shareholders happy then it would be commercial suicide to resist," he said.
Not all brokers pass fees onto customers - the decision whether or not to do so depends largely on their business models - but the days of fee-free options for clients in an environment of rising costs are numbered, participants said.
"There will always be a broker that will not pass the fees and take the losses in the hope they will see more flow but in today's environment that could be a risky move," the second LME trader said.
"The free ride was over a long time ago from a broker's perspective. Now it's a question of asking for a more level playing field," the first cat one member said.
(Additional reporting by Perrine Faye, editing by Mark Shaw)