What Is the London Metal Exchange (LME)?

The London Metal Exchange (LME) is a commodities exchange that deals in metals futures and options. The LME is a non-ferrous exchange, which means that iron and steel do not trade there. Instead, tradable contracts include aluminum, copper, gold, silver, cobalt, and zinc.

Located in London, England, the LME is the world center for the trading of industrial metals, with more than three-quarters of all non-ferrous metal futures business transacted on the exchange.

Key Takeaway

  • The London Metals Exchange (LME) is one of the largest commodities exchanges in the world.
  • Futures and options contracts on metals like gold, silver, zinc, and copper are listed for trading on LME.
  • Hedgers and speculators are active on the metals exchange, with hedgers turning to futures and options to mitigate risk and speculators seeking to make short-term profits by taking on risk.
  • LME represents the only remaining physical commodities trading market in Europe, as the trend has been moving steadily to electronic trading and away from open outcry.

Understanding the LME

The LME is one of the main commodities markets in the world and allows for trading of metals options and futures contracts. It also lists futures contracts on its London Metal Exchange Index (LMEX), which is an index that tracks the prices of the metals that trade on the exchange.

Options and futures contracts on LME are standardized with respect to expiration dates and size. Expiration dates are structured so that traders can choose from daily, weekly, and monthly contracts. Meanwhile, contracts are traded in sizes called lots, which vary from 1 to 65 metric tons in weight. Lot size will vary depending on the metal.

Market participants on LME are typically looking to hedge risk or seeking to take on risk. A hedger might be a producer or consumer and seeks a position in a future or options contract to protect from future price moves in the metals market. On the other hand, traders and speculators buy or sell metals futures or options to profit from short-term price moves.

Hong Kong Exchanges and Clearing has owned the London Metal Exchange since LME's shareholders voted in July 2012 to approve the sale of the exchange. The consolidation trend has become common among the world's exchanges to reduce costs, and as the exchanges fight for survival in a highly competitive world. For example, CME Group acquired the New York Mercantile Exchange in 2008. NYMEX, in turn, had merged with the Comex commodities exchange in 1994, creating the largest physical commodity exchange at the time.

Types of Commodity Exchanges

The London Metal Exchange has three methods of trading metals: open outcry, through the LME Select electronic trading platform, or by telephone systems. The nature of commodity exchanges is changing rapidly. The trend is moving in the direction of electronic trading and away from traditional open outcry trading where traders meet face-to-face or in trading pits.

In July 2016, CME Group closed the NYMEX commodities trading floor. NYMEX was the last of its kind, but the bulk of its energy and metals volumes had shifted to computers. In a similar move a year earlier, CME shut down a commodity trading floor in Chicago and ended a 167-year-old tradition of face-to-face trading in favor of electronic trading.

It is unclear how long the LME will be able to maintain its physical open outcry trading model. It is the only physical commodity exchange in Europe remaining. However, the rapid advancement and acceptance of electronic trading are not working in favor of the open outcry model.