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Home  >  Fundamental analysis  >  World exchanges  >  London Metal Exchange - LME


London Metal Exchange - LME



The London Metal Exchange - LME - can trace its origins back to 1571 although it was formally established in 1877 as the London Metal Market and Exchange company. Today it is the world's largest non-ferrous metals exchange.

The LME trades futures and options contracts in Aluminium, aluminium alloy, North American Special Aluminium Alloy (NASAAC), copper grade A, zinc, tin, primary nickel, standard lead and Silver. It also trades traded average price contracts (TAPOs) for aluminium and copper grade A, aluminium alloy, North American Special Aluminium Alloy (NASAAC), standard lead, primary nickel, tin and zinc. London Metal Exchange Traded Average Price Options (TAPOs) for copper grade A, high grade primary aluminium, standard lead, primary nickel, special high grade zinc, aluminium alloy and tin are Exchange cleared contracts based on the LME Monthly Average Settlement Price (MASP).

Because many users in the industry price their physical material on the basis of the LME MASP, brokers developed off-Exchange average price option products, known as 'Asians' which quickly became popular, particularly with large producers. To meet this growing demand, the LME developed the TAPO contracts.

TAPO contracts complement existing LME futures and traded options contracts. Users of the market who trade basis the MASP will tend to use TAPO contracts. However, hedgers who trade using the LME's flexible daily prompt system will find futures or traded options more suitable hedging tools.

The exchange introduced futures and options contracts based on an index (LMEX) of its six primary metals in April 2000. In 2000 the daily value of contracts traded on the LME was about $8,000 million and the first six months of the year saw record trading of over 35 million lots equating to $1,400 billion.

The LME market is a combination of floor and inter-office trading cleared by the London Clearing House (LCH). LME membership extends to over 100 companies.

Trading in the London market starts at 7.00am with the premarket session, where members make markets in the various metals from their offices. The trading floor of the LME, called the Ring, opens at 11.40am and each contract trades in turn for a five minute period. There follows a ten minute break from 12.20 to 12.30pm, after which each contract trades again for a five minute period.

It is during this second session that the settlement and official prices are determined. After these prices have been announced, usually about 1.15pm, kerb trading commences where all the contracts trade simultaneously until 3.10pm when the afternoon ring trading session follows the same procedure as the morning session. Kerb trading then lasts until 5.00pm but no official prices are issued after the afternoon session. From 5.00pm onwards trading returns to an inter-office basis and continues world wide through the night until focus returns to London in the early morning.

Today, LME-traded option contracts are available against the underlying futures contracts for all LME metals as well as for LMEX.

LMEX:

London Metal Exchange index - is a base metals index comprising the six primary non-ferrous metals traded on the Exchange: aluminium, copper grade A, standard lead, primary nickel, tin and zinc.

The index, launched on 10 April 2000, tracks the performance of the underlying metal contracts traded on the world's premier non-ferrous base metals exchange against this initial evaluation of 1000 set on 4 January 1999.

LMEX futures and traded options contracts have been specifically designed to provide investors with easy access to the world's industrial metals market, without the physical delivery, storage and transaction costs associated with the underlying contracts.

As an exchange developed contract, LMEX offers transparency with the security of clearing, stability through regulation and a global trading structure that are the hallmarks of the London Metal Exchange.

TAPO Contracts:

London Metal Exchange Traded Average Price Options (TAPOs) for copper grade A, high grade primary aluminium, standard lead, primary nickel, special high grade zinc, aluminium alloy and tin are Exchange cleared contracts based on the LME Monthly Average Settlement Price (MASP).

Because many users in the industry price their physical material on the basis of the LME MASP, brokers developed off-Exchange average price option products, known as 'Asians' which quickly became popular, particularly with large producers. To meet this growing demand, the LME developed the TAPO contracts.

TAPO contracts complement existing LME futures and traded options contracts. Users of the market who trade basis the MASP will tend to use TAPO contracts. However, hedgers who trade using the LME's flexible daily prompt system will find futures or traded options more suitable hedging tools.

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