What Is the London Metal Exchange and How Does It Work?

The London Metal Exchange or LME for short is the global commodity trading platform that operates with a focus on metal options and futures exchange. What’s more, LME is the world’s biggest metal-based futures exchange where market participants can trade all major instruments, including commodities and futures.

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In this article, you will learn how the London Metal Exchange works and how to use LME as a free data service to keep up with the latest commodity prices.

How does the London Metal Exchange Work?

As stated earlier, LME is the biggest commodity market (or one of the biggest ones) allowing market participants to trade different metals. The list of major instruments available for trading includes the following metals:

  • Gold.
  • Silver.
  • Aluminium.
  • Zinc.
  • Lead.
  • Copper.
  • Nickel.

Traders can access listed futures contracts available on the LMEX. They come as an index to depict current London Metal Exchange prices for metals available for the exchange. Each type of trading instrument is standardised regarding the size and expiration date.

Each trade is structured to provide flexible timeframes in reference to a specific expiration date. It means that traders are free to select desired contract periods. They may include daily, weekly or monthly contracts depending on a chosen trading strategy. At the same time, the volume of each traded contract is measured in lots ranging from 1 to 65 metric tons in weight for each traded metal. If you are a beginner trader, you might appreciate using lot trading calculators to make things a bit simpler.

On the one side, we have LME market participants who act as hedgers (both producers and consumers). Their main mission is to find a secure position in a futures contract that will keep their assets safe from unpredictable metal price moves in the future.

On the other side, we have LME market participants that operate as speculators (traders). They purchase or go short on futures contracts to make a profit on the rapid price movement within short time frames.

London Metal Exchange Trading Methods

It does not matter what group of market participants you represent. On the London Metal Exchange, there are three major techniques to perform trades. They include the following:

  1. Open Outcry. This methodology used to be popular with trades back in 2010. The idea is to manage commodities and futures in trading pits. The main feature of this particular method involved live signal and verbal communication between traders. Today, these methods are replaced with more advanced digital trading platforms.
  2. Telephone System. Another brick-and-mortar modality where traders or brokers accept orders from their customers by phone in real-time.
  3. LME Select electronic trading platform. An advanced trading methodology that makes it possible to handle contracts electronically. It makes the process faster making it possible for market participants to execute a bigger number of trades simultaneously.

With the introduction of modern ways of trading delivered by advanced technologies. CME Group had nothing to do but close the NYMEX floor in 2016. This is where actually commodity trading took place on a face-to-face basis featuring trading desks and other elements that have gone out of date.

Furthermore, the exchange was forced to end its 176-year history in Chicago and close the local commodity trading floor as well. It seems like the London Metal Exchange is about to give up maintaining its open outcry modality in favour of advanced electronic instrumentation.

Terms to Trade on LME

Although the exchange keeps going digital, baseline terms are still the same. If you want to enter the futures and commodities market on one of the biggest exchanges, you will need to know the following

  • LME Warrants – documents that prove one’s entitlement to the underlying lot.
  • Official Settlement Price – the last offered and settled price in cash for the futures contract.
  • Warehouse and Stock Reports – official reports featuring opening and closing stocks, cancelled warrants, stock movements, and so on.

London Metal Exchange Free Data Services

We have already mentioned that LME can be used as a self-sufficient source of information. Here you can keep up with the latest London Metal Exchange prices and other crucial information that refers to industrial metal pricing. Users can also learn about other instruments. For instance, the official LEM website provides cross-asset information about opening and closing stocks, wait times, live warrants, and more.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.