Metals Exchange Suspends Trading and Cancels Billions of Dollars of Trades

Hedge fund managers have been reminded that a trading profit isn’t a profit until it’s safely banked. On Tuesday 8^th March, the London Metals Exchange (LME) ripped up billions of dollars worth of trades that were booked in the exchange’s nickel market. Claiming that spiking prices were causing systemic instability in the market, the LME pulled the plug on all nickel trading activity and cancelled the trades booked in the previous eight hours of the session.

The extreme price volatility in the market that day meant many big players were left holding worthless ‘paper profits’ that they could not convert into cash. The total amount of cancelled trades is estimated to have been $3.9bn, so significant returns had at least been mentally banked by traders before being snatched away.

Nickel Price Chart – Closing Out of Trades Only

Source: IG

Dramatic interventions such as that carried out by the LME are relatively rare, but the problems for traders extend past not being able to realise P&L on nickel positions. Some of the trades booked in the earlier part of the session had been part of hedging strategies – with nickel being bought or sold in conjunction with a position in another metal. With only the nickel leg of the trade being torn up, those traders were left with only half of their strategy in operation.

Lessons to Learn From LME Suspending Trading

The havoc caused by the suspension of trading whilst impacting hedge funds, big banks and professional ‘local’ traders also offers an insight into market conditions for retail investors considering trading the booming metals market.

The intense conditions in the metals markets might be attracting newcomers, but a word of caution was offered by one of the pros who trades nickel on the LME. Luke Sadrian’s Commodities World Capital fund is up 120% year-to-date, so the seasoned pro knows what he’s doing. In a warning to retail newbies, Sadrian said: “Given the current uncertainty, I am exiting all of my LME positions, despite being ragingly bullish on copper.”

Source: Bloomberg

Trading the Nickel Market Using Stocks

Retail investors who are still looking to get exposure to metals have various routes to gaining exposure to the market while still managing their operational risk. Trading these top nickel stocks still locks in positions that follow the price of the metal, but equities offer a more vanilla route into the market. Trading costs can be lower in equity markets, and stocks also pay dividends. Nothing is guaranteed, but it does appear unlikely that the London Stock Exchange will suspend trading in nickel stocks, even if the LME suspends trading in the metal itself.

How to Find a Trusted Broker

Events at the LME also provide a reminder that good trading practice also involves using a reliable and trusted broker. Trading with an unregulated broker can result in investors recording a paper profit only to find that they can’t draw down their gains and potentially lose their deposit as well. If metals trading is still for you, whether in commodity or equity form, then head to this list of trusted brokers, which have been reviewed by the Forex Fraud team.

Crowdsourcing information about scam brokers can help others avoid falling into the traps set by disreputable brokers and you can share your experiences here. If you want to know more about this particular topic or have been scammed by a fraudulent broker, you can also contact us at [email protected]

About the author: Justin Freeman

Justin is an active trader with more than 20-years’ industry experience of working for big banks and hedge funds. He has an inside knowledge of how the financial markets work, thanks to roles including trader on a $750m Event-Arbitrage desk and CRO and COO of hedge funds running a variety of strategies. From stat-arb and trend-following CTA to fixed-income relative value. Firm’s he has worked at include big banks like Citi, and prominent hedge funds including D. E. Shaw and Millennium Capital Management.

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