The London Metal Exchange (LME) has been fined nearly £10million for its role in chaos that engulfed global nickel markets three years ago.
The exchange, famous for its central ‘ring’ where traders make deals in person, failed to ensure it could deal with ‘severe market stress’, the Financial Conduct Authority (FCA) said.
When the price of nickel tripled in a few hours, in March 2022, LME cancelled billions of pounds worth of trades, triggering legal action from aggrieved investors.
Trading in nickel, used in electric car batteries and steel production, was then suspended for eight days.
The ‘nickel pickle’ began after Russia’s invasion of Ukraine prompted fears over supply. Some investors were shorting nickel – betting that its price would fall.
One of the largest shorters was Tsingshan Holding Group, a Chinese nickel producer run by tycoon Xiang Guangda, known as ‘Big Shot’.
Fined: The London Metal Exchange is famous for its central ‘ring’ where traders make deals in person
As the price rose, Tsingshan had to ‘close’ its short position and buy into nickel, pushing the price even higher.
The exchange then cancelled several trades placed in the preceding hours, limiting the losses of both Tsingshan and Xiang.
But others in the market such as banks, commodity traders and hedge funds who stood to benefit from the price rise saw their profits wiped out.
While the courts have ruled the exchange acted lawfully, the FCA said LME’s actions ‘undermined the orderliness of and confidence’ of the market and fined it £9.2million.
It said some junior staff on duty during its ‘Asian trading hours’ of 1am to 7am London time, ‘had not been trained’ to recognise the causes of the dysfunction.
The FCA also noted that LME staff took steps to ‘accommodate’ the ‘increasingly extreme’ price rises.
This included disabling price bands, automatic controls designed to serve as circuit breakers to stop prices rising and falling too quickly. The watchdog said this allowed the price of nickel contracts to rise much faster.
Steve Smart, the FCA’s joint executive director of enforcement and market oversight, said: ‘The LME should have been better prepared to address the serious risks posed by extreme volatility.’
The watchdog acknowledged changes made by the LME, which dates back to 1877, since the scandal to strengthen controls, adding that the exchange accepted the findings and as a result received a 30 per cent discount on the fine.
Some critics alleged that LME, owned by a Hong Kong company backed by the Chinese state, may have been pressured by Beijing to protect Tsingshan.
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