The UK’s financial regulator has fined the London Metal Exchange (LME) £9.2 million for failing to maintain adequate systems and controls to handle a major short squeeze in the nickel market three years ago.
In its first-ever enforcement action against a UK-recognised investment exchange, the Financial Conduct Authority (FCA) stated that the LME’s controls were insufficient to manage extreme market stress.
Between March 7 and 8, 2022, the price of LME’s three-month nickel futures contract doubled in just over an hour, triggering unprecedented volatility. In response, the exchange suspended nickel trading for eight days and voided all nickel trades.
The FCA has revealed that only junior staff were on duty when nickel prices began to surge at the London Metal Exchange (LME).
During LME’s ‘Asian trading’ hours (1am to 7am GMT), oversight was left to relatively junior trading operations staff, who were only trained to identify error trades or rogue algorithms as potential market disruptions. As a result, when nickel prices escalated dramatically in the early hours of March 8, the issue was not escalated to senior management. Instead, trading staff attempted to manage the volatility by accommodating the price rises, even disabling price bands during the most extreme fluctuations.
This marks the FCA’s first enforcement action and fine against a recognised investment exchange. The LME accepted the findings, securing a 30% reduction in the penalty.
