IN “Casino”, a In the 1995 film, Joe Pacey played Nicki Santoro, a fierce gangster with a small fuse. Santoro lost to Blackjack extensively. If the next card is a photo card, he will lose some more. The dealer became the king of the club. Santoro angrily returns the card and, in the most salty language, instructs the dealer to try again. A nervous floor manager agrees. The dealer became the queen of hearts. Santoro gets even angrier. The dealer tries again. The same sequence — picture cards, obscenities, new contracts হয় is repeated, until Santoro wins.
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In real-life casinos, like in the financial markets, you don’t go for free if your bets are confused. Or you won’t get your money back — except, apparently, on the London Metal Exchange (LME) The buying and selling of nickel on the exchange is gradually becoming normal this week. But its reputation has been tarnished by the cancellation of some inconvenient transactions before the two-week break in active nickel trading. LME And the position of London as a financial center. A parallel that springs to mind LIBORেকAnother London-branded benchmark that has lost its global financial credibility.
Start with a recap. The price of nickel, a metal used in stainless steel and electric car batteries, has risen in the wake of the Ukraine invasion. Russia produces one-fifth of the world’s pure-grade nickel. The stock was already low. Then, on March 7, the price of nickel rose 66% to $ 48,000 per tonne. Prices doubled in early March. The LME Nickel suspends trading, judging that prices no longer reflect the underlying real market. But it went further. It canceled all trades made after midnight. Price increases, the exchange said, have created a systemic risk for the entire market.
What happened is a classic short squeeze. At its center was Tinshan Holdings, a Chinese nickel producer with a small position (bet on falling prices). LME But away from the exchange. Attempts to cover shorts by buying nickel at inflated prices have pushed up prices. There were fears that Tsingshan could not call its margins, pay interim money to the parties on the other side of the trade. That could take anything down LMEIts member-brokers. Exchanges stop trading from time to time. But canceling trade is extremely rare. And in other asset markets, the parties that lose out on extreme price movements have to bear those losses. They can’t flick the card to the dealer and hope he tries again.
The LME Has justified its actions to protect the integrity of the physical market. In doing so, divisions have been created. On the one hand there are miners and metal-bashers who rely on trading, pricing and exchange of hedging services. On the other side are the fund managers, who use its futures and options to gain exposure to products as a resource class. The LME, Which has a parent company in Hong Kong, seems to have supported the first group more than the second group For some, it was the right call. They see the exchange as a metal trading place, not a casino. But speculators are important. Producers sell futures to insure themselves against prices that threaten their well-being. Someone has to take the other side.
This is where parallel with LIBOR Comes. The rates offered by the London Interbank were to represent the interest rates where banks lent to each other overnight. This was done on the basis of a survey of bankers. During the financial crisis of 2007-09, some bankers submitted false quotes for their personal interests. Confidence is lost. But so was embedded LIBOR As a benchmark, it took many years to phase out.
Nothing though LME What he has done is illegal, compromised with confidence. Metal prices set on the exchange are much less central to financing, but they are still the industry’s pricing criteria. And as with LIBOR, It is not easy for users to quickly move their business elsewhere. Like all established exchanges, LME Benefit from the power of the network: The more traders it attracts, the more others will jump into it. One consequence is that LME The metal business has a strong market share.
Like many London institutions, it relies on its heritage. It has a history of 145 years and is the site of the last open shout in Europe. Seen from New York or Connecticut, though, the tradition looks like backwardness, and LMEIts a sign of instability in face-to-face trading. For now, nickel trading has resumed in London. The players are back at the table, some of them cursing like Santoro. But the game will not be the same again.
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This article is published in the Finance and Economics section of the print edition under the title “Twisted Metal”