Watchdog blasts London Metal Exchange over nickel trading debacle

International watchdog blasts London Metal Exchange over last month’s nickel trading debacle

The London Metal Exchange has been blasted by a financial watchdog following last month’s nickel trading debacle.

The International Monetary Fund accused the LME of potentially harming ‘free and fair markets’ when it cancelled a slew of trades as the price of nickel surged to record highs.

While this limited the losses faced by a Chinese nickel tycoon known as ‘Big Shot’, the IMF said in its report that the move led to ‘widespread criticism’ from other investors such as banks, commodity traders and hedge funds who stood to benefit from the price rise but saw their profits ‘wiped out’.

Conflict of interests? The International Monetary Fund accused the London Metal Exchange (pictured) of potentially harming ‘free and fair markets’ when it cancelled a slew of trades 

With critics claiming the LME favours its ‘cronies’, the watchdog warned exchange bosses about a ‘conflict of interest’.

The watchdog went on: ‘Governance mechanisms for the LME need to be strengthened to address conflict of interest. Measures must be in place to ensure that the concentration of trading does not adversely impact free and fair markets.’

The public chastisement, in the IMF’s Global Financial Stability Report, will come as an embarrassment for the LME, which dates back to 1877 and has long prided itself on being one of the world’s top exchanges on which to trade commodities.

UK regulators at the Financial Conduct Authority and the Bank of England have also launched an investigation but are yet to announce their conclusions.

The so-called ‘nickel pickle’ began last month after Russia’s invasion of Ukraine prompted fears over the supply of the metal which is used in electric car batteries and steel production. Some investors were shorting nickel – meaning they were betting that its price would fall.

One of the largest shorters was Tsingshan Holding Group, a Chinese nickel producer run by tycoon Xiang Guangda, who is known as ‘Big Shot’.

As the price rose, Tsingshan had to ‘close’ its short position and buy into nickel, pushing the price even higher.

The price more than doubled, climbing above $100,000 in a matter of hours, and the LME suspended trading.

The exchange then cancelled several trades which had been placed in the preceding hours – limiting the losses of both Tsingshan and Xiang.

But at the same time, investors who stood to benefit from the rise in the nickel price saw their winnings disappear. 

Critics have noted the exchange is owned by a Hong Kong company backed by the Chinese state – and allege Beijing may have pressured the LME to protect Tsingshan.

The IMF said: ‘While the stated objective of the cancellation of trades by the LME was to stabilise the nickel market, counterparties with long positions were put at a disadvantage.’

Clifford Asness, founder and boss of US hedge fund AQR Capital Management, even accused the LME of being ‘a criminal enterprise hiding behind manifest incompetence’.

Nicolas Aguzin, boss of the LME’s owner HKEX, said he was ‘sure the board of the LME will take the necessary steps to evaluate what are the lessons learned and how we can continue improving the market structure of the commodities market’.