The Nickel Trading Catastrophe on the LME

Patrick Boyle On Finance

Patrick Boyle

Investing, Business

4.9 • 320 Ratings

🗓️ 19 March 2022

⏱️ 21 minutes

🔗️ Recording | iTunes | RSS

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Summary

Send us a textIn markets, there are few principles considered more important by traders than the idea that when a commitment to a deal is made, it should stand come what may. So, there was uproar in the commodities market last week over the London Metal Exchange’s decision to bring the global nickel market to a halt and cancel futures trades because of a “short squeeze” on a Chinese tycoon facing potential billions of dollars of losses.In one of the most controversial moments in its 145-year ...

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0:00.0	Hello and welcome. You are listening to Patrick Boyle on Finance, a podcast exploring ideas from quantitative finance, examining events occurring in markets right now and financial history to see what lessons can be taken away, including interviews with some of the most interesting people in the world of finance. To learn more about the podcast, visit onfinance.org.
0:27.6	Early in the morning on Tuesday, March 8th, the nickel market, which had been wild for a while,
0:33.8	finally broke, and the problems were starting to spread to other industrial metals too like zinc
0:39.6	nickel whose price typically moves a few hundred dollars per day had jumped almost
0:45.1	$20,000 on Monday and by 6 a.m. in London it had more than doubled again trading at $100,000.
0:53.7	This was a 240% price rise in just over 24 hours.
0:59.2	A huge short squeeze was underway.
1:02.1	We should note that the price in nickel really matters to the global economy.
1:06.3	It's an important metal mostly used in making stainless steel, but also used in al-nickel magnets and rechargeable batteries.
1:14.6	This is not a video game retailer whose day-to-day stock price is significantly less important.
1:21.6	The huge short squeeze triggered billions of dollars of losses for traders, leading the London Metal Exchange to suspend
1:29.0	trading for the first time in over 30 years. This was the first major market failure since
1:35.2	Russia's invasion of Ukraine, and it showed how the removal of one of the world's largest
1:40.3	producers of an important commodity from the financial system could lead to chaos in global markets.
1:47.3	But there was much more going on here than just that. The London Metal Exchange made the
1:53.3	essentially unheard of decision to not just close the market, but to cancel all 5,000 nickel
2:00.3	trades that had been executed that day.
2:03.2	Trades were nearly $4 billion.
2:06.0	It's estimated that the exchange wiped out $1.3 billion of profit and loss on the deals.
2:12.4	They did this claiming that the decision was in the interests of the market as a whole.
2:17.9	By wiping a whole day's worth of trades from the record books, the exchange crossed the
2:23.3	line with traders who rely on the exchange.
	...

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