The London Metal Exchange (LME), despite its historic prominence, is grappling with fragmented liquidity as it tries to adapt its trading model for the 21st century. The LME’s core trading mechanism, established in the late 19th century, still revolves around a three-month rolling contract based on the time it took for Chilean copper and Malaysian tin to reach London in the 1870s. While shipping times have drastically shortened, the LME’s pricing remains anchored in this outdated model.
One of the few exchanges that still retains open outcry trading alongside modern electronic platforms, the LME’s intricate trading ecosystem—with its variety of daily, weekly, and monthly prompt dates—has inadvertently contributed to the dispersion of liquidity across multiple venues. A mere 48% of transactions occurred on its central LMESelect electronic platform last year, a figure far lower than the 95% typical for other exchanges.
Fragmentation of liquidity has also been exacerbated by the rise of proprietary trading systems and over-the-counter (OTC) relationships with LME members, drawing trades away from the central platform. A prime example of the risksthis creates occurred during the 2022 nickel crisis, when the LME struggled to monitor positions spread across multiple trading venues.
In response, the LME has introduced reforms aimed at boosting liquidity on its electronic platform. Central to this plan is the introduction of block trade thresholds, a common feature on other exchanges, which would require smaller trades (below 10 lots) to be executed electronically. These changes, however, won’t take effect until at least the second half of next year, with LME members expected to contest the specifics of the reform.
The LME is also facing increased competition from the CME Group, which has attracted significant investor interest with its newly launched contracts for battery metals such as lithium and cobalt. If the LME hopes to maintain its position as a leading global metals trading hub, it must evolve from its 19th century model and address its current market complexities.
