The London Metal Exchange faced pressure from one of its oldest members during its annual gathering as veteran hedge fund trader Michael Farmer called the cost of trading “prohibitive”.
The remarks at the annual dinner were greeted by applause in a sign of the pressure the Hong Kong Exchanges and Clearing owned exchange faces from its members after it raised fees to recoup some of the £1.4bn it spent acquiring the LME in 2012.
“If costs of trading on the exchange are prohibitive, it will drive customers away and the golden goose will die of malnutrition,” said Mr Farmer, founding partner of Red Kite, who started in the metal business in 1963 earning £8 a week and has attended more than 50 LME Week dinners.
To boost trading volumes the LME has been trying to attract more electronic and speculative traders.
It also slashed some trading fees in August after a backlash from its traditional members and mounting competition from rivals such as the CME that are keen to take parts of its business.
But many members say the fee cut has not gone far enough after the LME increased fees 34 per cent in 2015. Trading volumes fell 9.2 per cent this year.
“Many users will still find the cost of trading to be high and I would strongly recommend the LME to consider further reductions to attract liquidity back,” added Mr Farmer, who is a member of the House of Lords.
Mr Farmer also criticised high-speed electronic trading on the exchange, which he said might be deterring other traders and contributing to the decline in volumes.
“In fact, this may be part of the explanation why volumes are falling at the present time — there needs to be a level playing field for all users of the exchange,” he said.
Red Kite, which runs hedge funds and trades physical metal, has more than $2bn of assets under management and is one of the few metals-focused funds to survive the downturn in commodity markets.
Charles Li, chief executive of HKEx, called on members “not to rock the boat” in response to difficult trading conditions this year.
“Make sure you rock the boat when you see we’re going in the wrong direction hitting an iceberg, [but] don’t rock too hard, don’t rock so it leaks and don’t rock it every day,” he said.
After years of frustration trying to expand the LME in mainland China, HKEx decided to build a spot commodities platform in the southern city of Shenzhen, just across the border from Hong Kong.
Due to launch next year, it has a replica “red sofa” Ring, used by the LME floor traders in its main offices.
Mr Li wants to harness some of the trading capital available in China and eventually create pricing benchmarks and derivatives in Hong Kong based on prices on the Shenzhen platform.
“I have a strong conviction that what we promised you when we acquired the LME, our great China plan, is going to work,” Mr Li said.
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