What Is the London Metal Exchange (LME)

The London Metal Exchange (LME) is a commodities exchange in London, England, that deals in metal futures. Contracts on the exchange include aluminum, copper, cobalt, and zinc. Trading on the LME can be done in three main ways: through open outcry, via a telephone system between member companies, or on the LME Select — an electronic trading platform. The LME is a non-ferrous exchange, which means that iron and steel are not traded on the exchange.

Understanding the London Metal Exchange (LME)

The LME is one of the main metal markets in the world and allows for the hedging of metals risk through highly liquid and standardized exchange-traded futures contracts. The LME also trades plastics on its exchange and has an LME index option that allows traders to speculate or hedge the broader metals market as a whole.

The LME, the only physical commodity trading exchange left in Europe, is the world center for the trading of industrial metals — more than three-quarters of all non-ferrous metal futures business is transacted there. 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 123 months; it also allows for cash trading. It offers worldwide reference pricing and the option of physical delivery to settle contracts.

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 for a price of £1.4 billion. The consolidation trend has become common among the world's exchanges to reduce costs and fight for survival.

Limitations of Commodity Exchanges

The nature of commodity exchanges is changing rapidly. The trend is in the direction of electronic trading and away from traditional open outcry trading, where traders meet face-to-face and trade in what is known as a trading pit. For example, in July 2016, CME Group closed down the NYMEX commodities trading floor, the last of its kind, after all, but 0.3 percent of its energy and metals volumes shifted to computers. A year earlier, CME decided to shut down the commodity trading floor in Chicago, ending a 167-year-old tradition of face-to-face trading in favor of fully electronic trading.

It is unclear how long the LME will be able to maintain its physical open outcry trading model, but the rapid advancement and wide acceptance of electronic trading are not working in its favor.