ANALYSIS: LME plans technical changes to boost options activity

The London Metal Exchange plans changes to its options trading practices to boost the already growing demand for commodity options.  

Speaking after the Hong Kong Exchanges and Clearing-owned venue reported last week average daily options trading volume up 69% in the first half of 2024 to 38,000 lots, the LME’s head of market development said the group is working on technical changes.

Robin Martin told FOW: “Our options trade exclusively in the inter-office market which involves bilateral deals typically agreed on the phone. It doesn’t trade on screen in a dollar-quoted format as you would find on many other exchanges.

“The vision is that we will have continuous streaming two-way prices across all of our options contracts and, crucially, moving to a dollar premium quoted format. This evolution is reliant on new features being introduced to our new trading platform which is still some time off.”

The exchange plans to start to launch in August a new platform called LMEselect version 10 which will run in parallel to the existing technology for at least two months, the LME said in March.

Martin added: “The more immediate thing that we are working on as part of this standardisation is to move towards an automated expiry process.”

The industry standard is that in-the-money options coming up to expiry automatically exercise and allocate the underlying but the LME does not work that way, rather the client has to notify its relevant LME member if it wants to exercise the option.

Martin said: “This is a topic we have sought extensive feedback on from the market but the overriding ambition is to attract lots of new participants to our market and their expectation is that we adopt a more standardised and transparent format.”

The LME head of market development said the expectation is that the exchange’s existing clients will trade more with the LME if it automated the expiry process.

“I don’t have a date yet but we are very focused on seeking to deliver that next year.”

Looking ahead to the technology launch, Martin said: “For the new trading platform (LMEselect v10), having the algo test service ready in August is still the plan so our members can fully connect and test their algos. In parallel, the testing for the full deployment continues and we expect to be operationally ready in October then we will have to take a view on readiness to go live based on market feedback.”

Within the tech upgrade, there are features specifically designed to support high-volume options traders like market-maker protections as well as mass quoting and mass cancellation facilities.

Martin added: “It is a little premature to discuss incentive schemes in any detail but it is safe to say we’re talking to the relevant names in this space and getting feedback.”

The LME reached a 10-year high in average daily volume (ADV) in the three months to the end of June, marking a milestone in the group's recovery from the collapse in volumes following its controversial decision to close its nickel market in March 2022.

A new Singapore-based exchange called Abaxx launched at the end of June pledging to use its inhouse technology to transform how commodities such as nickel sulphate trades globally.

The head of ICE Futures Europe said last month the London-based venue plans to address a "risk management gap" with its planned nickel derivatives market, replicating the US group's success in the energy sector.

"Clients have come to us and asked us to do metals in the same way we do energy,” Chris Rhodes said in an interview. “If you think about it from a wider viewpoint, batteries are just energy by another means. Nickel is the first leg of that, and we are working with Global Commodities – building on our longstanding relationship in coal markets – to develop a derivatives market as and when that’s needed by physical players.”