Guide To LME The London Metal Exchange is the focal point for trading Base Metals as it provides a market place for price discovery and a structure that allows all those who want to manage the risk of future price movement the ability to do so. Likewise those who want to invest in metals to take advantage of price movements can also trade metals on the LME. To trade on the LME one needs a broker who will transact the deal on your behalf. The benchmark contract is a contract that will become prompt in 3 months time, hence the main price quotes is the 3 months price. Trades can, however, be traded for a multitude of prompt dates, for example in Copper's case a trade can be traded for any prompt date between cash to 3 months. Then every Wednesday from 3 months to 6 months. Then every third Wednesday from 7 months out to 63 months. The Official prices that the LME published once a day and that are determined from open-outcry trading in the Ring, show the prices for Cash, 3 Months, 15 months and 27 months. ( The Cash date equals two business days from today) The majority of trades conducted on the LME are done for hedging or speculative purposes and the trades are closed out on the LME before the contract becomes prompt. However all contracts assume physical delivery so a contract that is not closed out will result in metal being delivered or received. A holder of a long contract that is not closed out before delivery receives a LME warrant, while the holder of a short position that is not closed by the time it becomes prompt, is required to deliver an LME warrant to the broker. An LME warrant is a certificate for a specific tonnage of an approved brand of metal in a LME approved warehouse. More information about the LME can be obtained from the LME's website www.lme.co.uk London Metal Exchange – LME Trading LME Metals. Trading Metals on the LME can be done 24 hours a day although the most liquid time is during the London day where trading is carried out through a combination of the inter-office telephone market, across the the Ring, or via various electronic trading systems. Ring trading starts in London at 11:45am and continues until 5pm with trading outside this period continuing via the inter-office telephone market and electronic trading systems. The ring offers the traditional benefits of transparency which attach to a physical, open outcry marketplace, but it is only available for a part of the 24 hour working day. A modern financial market needs to be able to service the needs of its customers for all of the working day, if not longer, and so the LME accommodates this by inter-office trading. This is a system that deals like the foreign exchange, bond or stock markets, but then clears like a ring-traded contract. In other words, people can see an indicative price on a screen as they contact a broker, and then complete a deal there and then. Brokers continue to provide indicative prices which are available through vendor screens. The actual prices quoted to a prospective client by a broker will not necessarily be identical to the indicative prices, but will depend on the size of the deal, the state of the market, and on the client’s credit rating and relationship with the broker. If a broker’s quotes are noticeably out of line with the indicative prices on the screen he is likely to lose business. It is in the firm’s own interest to ensure that the prices on the screen are kept up-to-date, especially in fast moving markets. Transactions done through the inter-office trading system are “real” LME contracts and pass on through the matching, clearing and settlements procedures. Trading in the Ring Ring trading is so called because the LME uses a “ring” with the traders sitting at fixed points around the circle. This contrasts with the “pit” style of trading more typical of open outcry futures exchanges, where dealers move around. The LME system of fixed points clearly helps with the identification of the firms trading, but it is only feasible because the Exchange has a small number of members permitted to take part in ring trading. At present there are 12 “ring dealers”, and all business which is required to be dealt “across the floor” must be passed through a ring dealing member. A significant proportion of all LME contracts are traded in the ring sessions, including the kerb, or as a result of that trading. The balance goes through the inter-office telephone market and LME Select. The ring sessions, and especially the second morning rings from which official prices emerge, concentrate liquidity because the physical trade requires prices as close as possible to the daily settlement prices. This concentration of liquidity ensures both transparency of pricing, and more representative prices than may be obtained through inter-office trading. The ring itself is about 6m in diameter, with two large display boards above it showing the official prices. There is a special booth where the Exchange’s staff monitor the prices and input bids, offers, spreads and trades made into a computer system. This is instantly sent to the various news vendor services, who display LME prices. Behind each firm’s ring seat is a place for assistants to stand in order to pass orders into the ring and to give commentaries to customers about current market conditions. LME Select Screen Trading System LME Select is the official exchange operated electronic trading platform, available in addition to open outcry ring trading and the telephone market. Member firms are connected to the system which allows accredited traders to execute trades via the screen. Flexibility and functionality are the key words associated with this system. Flexibility, in that the system allows traders a wide range of preferences for setting screens tailor made for their individual needs. Functionality, in that the basic screens required for trading are supported by a number of screens giving in-depth analysis of the market and executed trades. The system allows trading on all LME contracts, futures, options, traded average price options (TAPOs) and carries. It will also allow for straight through processing whereby LME Select trades will automatically be sent to the matching and clearing systems operated by the London Clearing House (LCH). LME Select operates between 07:00 and 19:00 (London Time). LME Glossary Cash Spot metal that is due for delivery two business days from today. Tom-next (T/N) Metal due for delivery the next business day - may only be traded until first ring close. Three Months (3m) This is the most active basis for LME trades and quotations and is the assumed benchmark. The actual 3m date is generally the nearest date 3 months out from today's date. Official prices (Officials) The prices verified by the Quotations Committee based on the last bids and offers at the close of the second a.m. ring for each metal. The official cash, three months and forward prices are announced on the Exchange at approx. 13.15 each day. Settlement price The official cash sellers price used as the base price for most physical contracts and as the basis price for settling LME cash positions. Unofficial prices The closing prices for each metal at the end of the afternoon ring. Carries A term for borrowing and lending metal transactions, whereby two different prompt dates are simultaneously bought and sold for an agreed price differential. Contango When the forward metal price is higher than the price for a nearer date. Backwardation When a forward metal price is lower than the price for a nearer date. Spread The price differencial qouted for a carry between two dates Level When a forward price is the same price as a nearer date. Borrow A carry where the nearby date is bought and the forward date is sold. Lend A carry where the nearby date is sold and the forward date is bought. The Kerb A period at the end of both the morning and afternoon sessions when all metals trade simultaneously - named after the ancient practice of dealers continuing to transact business on the kerb (or pavement/sidewalk) after leaving the Exchange. Warrant The document of title to metals stored in an LME approved warehouse - a "bearer" document, issued by the warehouse and showing details of its own specific parcel of metal.. Sword Automated Depository System for LME warrants allowing electronic transfer of title without the need to physically move documents.