The City of London Metal Exchange is like the Wild West

This has to change if traders want to be able to trust the London Metal Exchange following the insane nickel surge.

Marc Rich, the famous godfather of modern commodity trading, believed he could control the global metals market. It was a time of wild trading in London’s City. There was no regulation and traders could do what they wanted. He aimed his efforts at the zinc market in 1992 and accumulated a large position on the London Metal Exchange. However, his bet was a failure with zinc prices plummeting 25% within a month. He lost more than $170million and ultimately control of Glencore Plc.

It’s déjà vu, thirty years later: the same hubris and the same lax regulation all in one place, the commodities Wild West at the LME. Rich can be replaced by Xiang Guangda (another self-made metals tycoon), and zinc could be replaced with nickel.

After nickel prices soared 250% over two days, the LME had to close down nickel trading. Xiang, the largest producer of nickel in the world, Tsingshan Holding Group Co. had a large bearish bet. Fears of sanctions pushed nickel prices higher after Russia invaded Ukraine. These regulatory errors could result in billions of dollars of losses and damage to the reputation of the top metals market.

Short squeeze; Nickel prices soared to an all-time high Tuesday, rising approximately 250% in two days. This forced the London Metal Exchange (LME) to close trading

This is more important than the world of metals trade. Nickel was used mainly to make stainless steel in the past. However, today, metal is an essential component of high-efficiency electric car batteries. Elon Musk, the founder of Tesla Inc., tweeted last month that his “biggest concern”, nickel supply, was his company.

The LME is the primary market for nickel traders. This is where Xiang (also known as “Big Shot”) placed his bet over many months. This position was probably the most secretive on the market and the LME knew about it.

Rich’s wager also collapsed. Except for that zinc, prices dropped 30 years ago; Xiang was defeated by nickel rallying. Xiang, a bearish investor, tried to buy back his bets as the price rose. This triggered a short squeeze. The market was relatively orderly until then, even though it was chaotic.

Things got strange. In a self-feeding frenzy, traders increased their buying power and pushed the nickel price higher. Nickel prices rose 90% Monday, making it the largest single-day increase in nickel prices. The LME decided to reopen on Tuesday morning despite clear signs of stress.

However, the London short-squeeze grew worse overnight and prices rose much higher. They reached an all-time high at $101,365 per metric tonne, up from $201,75 in January. The LME closed the nickel market at 8:15 in London. Commodities traders were already betting billions of dollars in nickel and cross-commodity trades. All overnight transactions were also cancelled by the LME, which made a mockery of its principles for free-and-fair trade.

The exchange should have been closed at Monday’s end — and the Financial Conduct Authority in the United Kingdom should have demanded it. LME must admit that its decision to allow trading to continue was problematic. It has now stopped overnight trades, resulting in hundreds of millions of dollars in losses and profits. What is the reason it did that? Nobody seems to be able to answer that question.

The exchange fears that many of its members will go out of business if they don’t allow trades to continue. The LME is effectively bailing them out with money from bullish traders, who would have made huge profits in an instant. The LME has decided to close the nickel market until March 11th because of the severity of the crisis.

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