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The London Metal Exchange LME is the futures exchange with the world's largest market in options and futures contracts on base and other metals. As the LME offers contracts with daily expiry dates of up to three months from trade date, weekly contracts to six months, and monthly contracts up to months,  it also allows for cash trading.
It offers hedging , worldwide reference pricing, and the option of physical delivery to settle contracts. The London Metal Market and Exchange Company was founded in , but the market traces its origins back to and the opening of the Royal Exchange, London. Before the exchange was created, business was conducted by traders in London coffee houses using a makeshift ring drawn in chalk on the floor.
At first only copper was traded. Lead and zinc were soon added but only gained official trading status in The exchange was closed during World War II and did not re-open until The exchange ceased trading plastics in Many deals are made for commodities to be delivered in three months' time. The custom stems from the time that copper cargoes originally took in on their voyage from the ports of Chile. Purchasers of contracts, which are then left to reach maturity, will receive a warrant for a specific LME approved warehouse to take delivery of the metal if required.
The LME issues, each day, detailed figures on how many tonnes of each metal is in its warehouses, which helps producers and consumers make correct business decisions.
Open-outcry is the oldest way of trading on the exchange, though nowadays the majority of trades are placed electronically. Prices are derived from the most liquid periods of trading; the short open-outcry ring trading sessions, and are most representative of industry supply and demand.
The official settlement price, on which contracts are settled, is determined by the last offer price before the bell is sounded to mark the end of the official ring.
There is constant inter-office trading, a relatively small yet important portion of trading is still done by open-outcry in the Ring. There are a morning and an afternoon trade, where each of the nine metal contracts are traded in two blocks with a five-minute session for each contract the sessions last from The second trading block in the morning is key to setting the Daily Official Exchange rates.
After the official trades of sessions one and two, there are 85 and 45 minutes of "kerb" trading respectively. Whilst the price discovery mechanism used by the exchange is post-trade transparent it is not pre-trade transparent.
Pre-trade transparency is required for many securities under the Market in Financial Instruments Directive MiFiD to achieve fair markets by reducing such illegal abuse as market manipulation. The LME is the last exchange in Europe where open-outcry trading takes place. Ring Dealing Members are entitled to trade in the Ring during the ring-trading sessions.
Ring Dealing Members are Clearing Members, who hold the exclusive right to trade in the ring; . In addition to the 9 companies that have exclusive rights to trade in the Ring, around companies are involved in the LME in total.
Contrary to popular belief, the precious metals, gold and silver , are not traded on the London Metal Exchange, but on the over-the-counter market usually referred to as the London Bullion Market , by the members of the London Bullion Market Association. Platinum and palladium are traded on the London Platinum and Palladium Market. Many companies involved in minor metals are members of the Minor Metal Trade Association.
The LME used,  however, to provide trade matching and clearing services to the London bullion market and distributes gold, silver, and gold IRS interest rate swaps forward rates on behalf of the LBMA. In reality, physical delivery occurs in a very small percentage of cases on the LME as most organizations use the LME for hedging purposes.
The small percentage which does result in delivery, however, plays a vital role in creating price convergence.
To support this mechanism, the LME approves and licenses a network of warehouses and storage facilities around the world. Controversy arose in because the LME took action to limit the use of its warehouses for the hoarding of aluminium. From Wikipedia, the free encyclopedia. This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources.
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