The London Metal Exchange needs to overhaul how it oversees live trading to prevent another market collapse after it was forced to cancel $4 billion in nickel trades, a report into the fiasco says.
The exchange needs to improve its risk and control functions and upgrade its volatility controls, according to consultants Oliver Wyman, who were commissioned by the LME to review what caused the March 2022 crisis in the nickel market.
The exchange cancelled $4 billion in trades on March 8 after a short squeeze stemming from a position held by Chinese steel manufacturer Tsingshan sent nickel prices soaring by more than 240%.
The move erased an estimated $1.3 billion of gains for long position holders. In the aftermath of the incident, nickel trading was suspended for more than a week.
Oliver Wyman investigated the events that led up to the breakdown, including the growing threat of sanctions on Russian nickel producers and low nickel warehouse stocks. Following the invasion of Ukraine on Feb. 24, nickel prices rose in line with other metals, and bid-ask spreads remained at typical historical levels, it found.
But “large short positions had been built-up by a number of participants long before concerns over the invasion of Ukraine surfaced,” the report said. “Two positions, both with significant [over the counter] components, were particularly large in relation to the financial resources of their owners.”
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