Cooperation with the Singapore Exchange (SGX) to open metal trading to a broader community in Asia will be on the agenda when the London Metal Exchange board meets on Friday ahead of the annual LME dinner on Tuesday.

The dinner is the highpoint of the industry’s social calendar and an opportunity for the exchange to announce new initiatives.

 

In late July, the LME and SGX announced plans to jointly develop cash-settled mini monthly metals futures contracts cleared through SGX and SGX and LMEmini cooperation is expected to form part of the discussion.

 

An LME spokesman confirmed that cooperation with SGX would form part of the board’s deliberations, but declined to add more detail.

 

The plan is for a launch in the first quarter of 2011 that would resurrect, albeit in a slightly different form, the dormant LMEmini product -- a cash-settled, monthly prompt reduced lot size version of the exchange’s benchmark contracts.

 

A mini contract with an Asian focus could attract liquidity, one market watcher said.

 

 “You can see the motivation to increase the relevance and liquidity of the market in Asia and diversify participation. The LME wants to increase its footprint in Asia, where the influence on prices is growing,” a second trading source said. 

 

The structure of forwards markets, in particular negative roll yields when rolling contracts into a contango, was less of an impediment to investors in Asia, he added.

 

“Retail investors are buying a truckload of gold and there is a propensity towards hard assets. Investment habits in Asia tend to be shorter term -- intraday, not buy and hold. Day traders are very active in currency markets, so roll yields may be less of an obstacle if their focus is to be active intraday in metals.”

    

In a contango market, forward contracts are more expensive than spot. To make money on a contract held until it expires, prices have to rise by at least the amount of the contango just to break even.

 

In the case of LME copper, the contango between the benchmark three-month future and cash (MCU0-3) is a fairly narrow $17 or 0.2% of the contract prices, but when the market is less tight that can expand to 1 or 2% on a three-month basis.

 

“I think they are trying to develop a Shanghai-style market -- a bit of a casino,” a broker in London said.

 

Trading on the Shanghai Futures Exchange is heavily influenced by day traders, happy to shift money in and out to take advantage of very short-term trends.

 

But others said a new product would face an uphill battle and have to brave the same challenges as previous attempts.

 

“I don’t think there is the appetite for this kind of thing. The only way you could get people to use it would be to pay them. It’s not going to fly,” said one Singapore-based metals trader.

 

However, the LME may be taking steps to polish up the attractiveness of its existing small contracts.

 

In a member notice last month seen by Reuters, the exchange said it would change the order to trade ratio. At the time an LME member would have had to complete one trade for every 12 bid or asks or risk sanction by the exchange.

 

The adjustment raised that ratio to 20 for full-sized contracts and an unlimited number for LMEminis.

 

“That could allow market makers to deliver bids and offers into Select without being fined if they don’t transact,” said a London-based Category Two member.

 

But the move by the exchange puzzled the first London broker.

 

“I am not sure what the LME are trying to do with them. For years they have been trying to attract members to cater to the big institutions, not retail.”

 

“Minis lend themselves to retail investors. We only handle professional investors, so as a house we probably won’t use them.”