Metals trading on the LME - How to ?

[qazwsxedc]

Hello all,

I've looked at metals trading on the LME (London Metal Exchange) a couple of times, but always found it geared very much towards industrial users, partly because it is a forwards market rather than a futures market.

Are there any speculators here who trade metals or metal options on the LME ? If yes, how do you find it working compared to other commodities markets ?

 

[Laughing Boy]

It's not a forwards market (like bullion & FX) - I assume you are referring to the fact that if you close out a futures position you don't receive (or pay) the P&L until the prompt date - the broker would keep a 'forward' ledger. The LME is virtually unique in this respect.

Anyway, yes a lot of LME business is for non-speculative hedgers but certainly not exclusively. The broker I worked for had many speculators as clients - unfortunately we were asset-stripped!

 

[qazwsxedc]

Well, not receiving/paying P&L until the prompt date is one thing, but the brokers I have come across deal with it by treating as marginable equity any closed out position in the LME forward ledger, so no big issue here. The main issue for me, being used to more straightforward futures markets, is the relative opacity of the LME quote data.

There are daily contracts available up to one or three months out, but usually spot, 1 month out and 3 months out are the only quoted ones.

As I understand it, if I enter a 3 month out position today I can deal on the basis of a published price. If I want to close out that position in a week I need to look at the then-prevailing 3 month price, which is for a prompt date 1 week beyond my position, and then...what ? Apply a one-week spread for 3 months out, figure out a cost of carry myself and drop a quote into the market, hoping that someone bites, or something else ?

Historical price availability from the LME seems dire, too. Or am I missing something ?

 

[Laughing Boy]

Hi

Well, I'm nor sure what prompt dates your broker is offering you but the LME is a daily market - so even beyond 3 months you trade days. So for eg LECU (Grade A copper) prompt dates are as folows:
Every day for first 3 months
Every Wednesday for months 3 to 6
Every 3rd Wednesday for months 7 to 63

(Copper & Aluminium are tradeable 63 months out, other metals 27, I think)

So if you enter a 3-month out position it would be for one of the 4 wednesdays. Between 7 & 63 it's for the 3rd wednesday - it's still a daily prompt date.
I'm probably missing something, but you can close out your say 5th May deal at the prevailing price any time up to the 5th May - the prompt date is not "1 week beyond your position".
Not sure about availability of historical data - we used to keep it indefinitely. you could try lme.co.uk
I hope this helps.
P.S. LME is NOT a cash-cleared market so make sure your positions are closed out otherwise you'll take delivery in the form of a warrant for a load of metal.

 

[oatman]

Trade Comex.

 

[qazwsxedc]

Laughing Boy,

Thanks for your reply. Let me rephrase the question:

Let's say I buy 10 tons of 3-month copper tomorrow, that would give me a prompt date of 5 May 2004. I can get a good idea of the prevailing price by looking at the quotes for 3-month copper.

Next week I want to flatten that position, so then I want to sell 10 tons of copper, prompt date 5 May 2004. However, at that time I find it difficult to get quotes for prompt date 5 May 2004 because the data feeds I have come across don't carry daily quotes, they have say spot, monthlies, and a couple of calendar spreads. So how do I arrive at a sensible price for offering my copper to the market ? Interpolate between 2-month and 3-month prices ? Subtract a week's carry from the 3-month price ?
Something else ?

 

[Laughing Boy]

Interpolation would get you pretty close, but generally if you can't get quotes for the prompts you've traded then I wouldn't trade them, in which case I'd trade COMEX instead as Oatman suggests.

Good luck.

 

[CityTrader]

qazwsxedc

Don't forget the LME probably has more backwardations than any other futures market! Don't necessarily assume you can extract the value of your open position from the nearest quoted month.

Laughingboy - when did this accepted settlement system for past 3 month trades happen? I used to work on the LME years ago, and past 3 months was treated the same as cash till 3 months- i.e. a different settlement date for each trading day..

 

[Laughing Boy]

City Trader

Sorry, I didn't think I'd described a new settlement system for past 3 months - not quite sure what you mean. But nothing in this respect has changed as far as I know.

 

[PeterTT]

I have traded/ am trading them via a spread betting company (IG Index) .. they just quote a 3 month outrite around the LME market makers. You then have to sell/buy your exact date (within 3 months!) to square your position .. The spreads are probably too costly if you want to day trade, but I prefer Spreadbetting as it suits my trading style and most importantly you do not have to pay the tax man 40% of your profits (UK based).


Peter

 

[oatman]

I thought you sold the 3month and then adjusted for the date.

 

[tcheesman]

Can anyone here please explain LME carries to me or direct me to a source of information that can exaplin them? I'm confused about why they are necessary and how to calculate them.
Regards