The London Metal Exchange turned backwards

In reality, the power of path dependence is stronger than expected. Coupled with the fact that the fence of financial regulation has not been further tightened, the large-scale trading envisaged by the London Metal Exchange gold contract has not arrived.

For the London Metal Exchange, which is making waves in the global non-ferrous metal sector, it is now a harvest season. The annual event of the London Metal Exchange finally reunited in London after two years.

Metal Week's annual meeting is not only a reunion of old friends after experiencing the epidemic lockdown, but also includes the optimism brought about by the recent surge in metal prices, after all, at the same time as the metal annual meeting was held, zinc and copper led the London Metal Exchange metal index to record highs due to the tightening of supply.

But it's not all good news during Metal Week: after four years of hard work, the LME's efforts to take a place in the London bullion market could come to naught. This not only reflects the difference between the precious metal market and the industrial metal market, but also highlights the difference between the over-the-counter market and the over-the-counter market.

In 2017, the London Metal Exchange began to test the gold market with the "golden dream", hoping to successfully transplant its success in non-ferrous metals such as copper, aluminum, tin, lead, zinc and nickel to the precious metals field.

After all, more than 80% of the world's non-ferrous metal futures are traded on the Platform of the London Metal Exchange, which gives the London Metal Exchange the confidence to open up a new front. Many customers who trade non-ferrous metals on the London Metal Exchange are also engaged in precious metals trading, so the London Metal Exchange has some advantages in terms of user bonding.

The turmoil over pricing power in the London gold market after 2013 also gave the London Metal Exchange an opportunity to enter this market. LME bet contracts will benefit from increased financial market regulation, and london's multibillion-dollar gold trading will gradually shift from over-the-counter trading between banks and brokers to centralized clearing exchanges.

The LME's return to precious metals has been discreet, starting with the pricing of smaller platinum and palladium and the planning of six platinum group metal-based contracts. The London Metal Exchange then partnered with some well-known market makers in the gold market to jointly launch gold and silver futures. In addition to Goldman Sachs and Morgan Stanley, partners such as ICBC Standard, Societe Generale, Banco Deutsches Deutscher France, proprietary trader OSTC and industry body World Gold Council have agreed to promote the trading of London Metal Exchange contracts, from which 50% of the relevant revenue can be obtained.

The London Metal Exchange and its partners had hoped that after the tightening of financial regulations, the exchange would gradually gain the upper hand in the over-the-counter showdown, because regulators believe that exchanges are safer and more transparent, and in theory, especially for market makers, clearing can reduce capital costs.

But in reality, the power of path dependence is stronger than expected. Coupled with the fact that the fence of financial regulation has not been further tightened, the large-scale trading envisaged by the London Metal Exchange gold contract has not arrived.

In the process of waiting for the wind to come, the valuable liquidity has not been upselling, so some partners have slowly lost patience. Societe Generale exited over-the-counter trading of commodities two years ago to boost profitability and no longer play the role of gold and silver futures market maker on the London Metal Exchange. Recently, news has been that a number of banks are preparing to abandon this cooperation project with the London Metal Exchange after a delay in achieving the expected trading volume.

The team dispersed, and the product was not good. At the annual meeting of the London Metal Exchange, even the most optimistic people can hardly think that the precious metal contracts of the exchange in the past four years can be regarded as a successful project. Perhaps it is time for the London Metal Exchange to turn back again.

(The above content does not constitute investment advice or operation guide, according to this market, at your own risk)