London 14/10/2014 - Liquidity on the LME could plunge following the exchange's decision to increase fees, with the trading fee - in isolation - almost doubling, users of the exchange said.
The LME said at the end of September it would raise total fees from the start of next year by 34 percent on average; traders have since been assessing the probable impact on their business and on Tuesday expressed fears about a drop in volumes, lower profits and an angry response from their clients.
"If you strip out parts of the enhanced clearing fees that the community has had to incur in the last year or so, trading fees probably are closer to a 100-percent increase rather than the numbers being spoken about," Michael Overlander, chief executive of ring dealing member (RDM) Sucden Financial, said.
Fee increases of around 100 percent in the ring and on Select will directly affect category 1 and 2 members of the exchange, Martin Pratt, chief operating officer at RDM Triland, warned.
"Fee increases of a similar scale will also be applied on client-facing trades, together with the introduction of an entirely new client-facing fee for short-dated carries. This new charge will almost certainly spell the end of the current commission-free terms for short-dated carries that have been enjoyed by metals customers for so long," he added
By way of an example, Overlander said a non-RDM telephone transaction of $0.33 at present will increase to $0.65 next year.
"This is a very, very big pill to swallow… can [HKEx] do something about this? I don't know… I would hope so," he added. "What they can do from here is listen to the market and hopefully not damage the product they bought in the first place that they thought was a good enough jewel to put in their crown."
The increases came as no surprise given that parent company Hong Kong Exchange & Clearing (HKEx) would look to make back the 1.388 billion pounds it paid for the exchange in December 2012.
But a return on business for the exchange should not come at the detriment of its members, participants said - the industry already struggles against a harsh regulatory backdrop and increases in margins on the LME Clear, which went live in September.
"These fee hikes come on the heels of vast increases to clearing fees," Pratt said. "In just 16 months, there has been a nine-fold increase in the value of clearing fees payable in respect of registered LME contracts."
Fee increase are unlikely to be repeated on such a scale in future, LME CEO Garry Jones said, believing the changes to be "fair" and "sensitive".
"The average increase in transaction fees (which includes both trading and clearing components) will be 34 percent, which means that for some users it may be higher and for others it will be lower, depending on the type of trades entered into by the user in question," an LME representative said.
"We endeavoured to make the fee schedule transparent, proportionate and moderate, balancing the needs of all types of members and clients, taking into account the different business models adopted by our user base," the exchange added.
Brokers, many of whom made a tidy sum when the exchange was sold to HKEx, said greater participation with the exchange's users would have been welcomed before a decision was made.
"They must not make the mistake of regarding the exchange as a 'form' of cash-cleared futures market - they must listen very carefully to all market participants when it comes to change and not consciously dismantle anything non-trading related that went before," one said. "The exchange exists because of its members and customers and not in spite of them."
Brokers will now look at business models to see how, and if, they can pass these increases onto customers.
"In the bigger picture it is not that dramatic but for the brokers it is a problem as to what to do with these increases - it is a broker-to-broker conversation," a trader said.
"The cost has got to be borne by somebody and the LME alluded to fact that the cost of the exchange was a big price to pay, which is true, and some of those costs are being filtered down the food chain," Overlander said. "As to who will ultimately bear it, I think time will tell."
"The brokers with clearers make up their own mind as to what they will be doing but the general mood is that the impact in the market is so significant that it may have to be redistributed," he added
The exchange remains competitive compared with its rivals despite the fee increase, Société Générale analyst Robin Bhar said
"Ultimately, the LME is a financial institution - however, they should not ignore industry wishes," he added.
"The fee increase will not be enough to drive people out of the markets. It is still cheaper than competitors, but it doesn't help with those struggling with all the extra costs at the moment," INTL FCStone analyst Edward Meir added.
But it is not possible to make a like-for-like comparison with other exchanges, a floor trader argued.
"With the extra fees one loses profitability," he said. "You have a choice to make to remain in the game - do you absorb the price and gain a bigger market share as other brokers are forced to increase fees or do you put up the fees you charge?"
(Editing by Mark Shaw)