The London Metal Exchange (LME) has introduced implied pricing for base metals on its electronic trading platform, LMEselect, as part of its Strategic Pathway commitment to deliver greater user choice and market participation.

Many existing users of the LME market (and, in particular, fundamental financial investors) seek exposure to monthly (or “third Wednesday”) prompt dates. These users are already well-served by the deep monthly liquidity available from LME members in the telephone market or through members’ proprietary electronic platforms, and the LME expects this to remain the primary channel for the execution of larger monthly orders. However, in the context of its 2017 market-wide discussion paper, the LME learnt that a number of new users would be more likely to commence LME trading if it were possible to execute smaller monthly trades through member-provided direct electronic access to the LMEselect screen.
 
Accordingly, from 30 July, market participants will be able to see and access previously latent liquidity on monthly dates through LMEselect. Implied pricing, which will simply combine the liquid 3-month outright order book with the “carry” (or calendar spread) order book to create (or imply) the most competitive monthly outright orders in both the month before and the month after the rolling 3-month date, will bring greater on-screen execution opportunities on those monthly outright dates.
 
Already in operation in the LMEprecious market, implied pricing has the potential to benefit those investors looking for a simple way to access smaller clips of LME monthly liquidity, as well as LME members who will be able to distribute their carry prices more broadly through LMEselect. 
 
Matthew Chamberlain (pictured), LME CEO, says: “Implied pricing simply delivers a new way to access existing monthly liquidity. We expect this additional option will appeal to those smaller fundamental financial investors not currently accessing our market who will now have the opportunity to see and trade quoted prices on the screen.”
 
“There will be no specific financial incentivisation to trade the implied monthly prices – and we anticipate that our existing core clients will maintain their current access model – but our aim, as we stated in the Strategic Pathway, is to build liquidity by providing greater choice to our users and to lower barriers to entry for those currently not accessing our market.”
 
The LME will make implied pricing routes available for its six main base metals (aluminium, copper, lead, nickel, tin and zinc) starting from 30 July. Implied prices will show the best bid and the best offer for each implied route. The LME will keep the performance of the outright pricing under ongoing review, with the aim of ensuring that it operates for the benefit of market participants.