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, meaning the exchange does not trade iron and steel. Instead, tradable contracts include aluminum, copper, gold, silver, cobalt, and zinc. Located in London, England, the LME is the world center for industrial metals trading, with the majority of all non-ferrous metal futures business transacted on the exchange.
Understanding the London Metal Exchange (LME)
The LME is one of the main commodities markets in the world and allows for the 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.
Market participants on the LME are typically looking to hedge risk or seeking to take on risk. A hedger might be a producer or consumer and seek 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.
Trading Metals on the LME
The LME 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 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, the 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.
Example of LME
An investor looking to trade on the LME has three options: via the LME’s electronic portal, LMEselect, the Ring, or on the 24-hour telephone market. Investors must conduct their trading through an LME member. Information on how to become a member as well as a list of LME-certified members is available on the exchange’s website.
Once you have selected a method and member through which you will conduct your trading, the next step is deciding which type of contract and for what metal you’re looking to purchase. The LME offers six contracts for its fourteen underlying metals: futures, options,