BOCA RATON, Fla. The London Metal Exchange might introduce market makers to boost liquidity in new contracts going forward, including nonmetal products it might eventually launch.
New LME contracts or tweaks to old ones would be helped along by having market participants prepared to take proprietary risks, LME chief executive officer Garry Jones told AMM in an interview at the Futures Industry Associations annual conference in Boca Raton.
You have got to have proper traders who will take the other side of the trade, and you should encourage proprietary risk-taking in the market. If youre going into new areas, you need people to make markets, he said. Its more for new products, but of course if we expand our options portfolio of products, which we are clearly looking to do, then most successful markets on exchange options have market makers who make markets in volatility and then delta hedge the underlying on the core markets. So you have got to create the incentive for them to do that.
Physical premium contracts are another good example of when market makers could be needed, Jones said.
The LME has said it will consider physical contracts, but many questions remain. We have started talking to people about physical spread contracts, and the question there is should it be electronic or in the ring? Can we think of new business to put into the ring? said Jones, who this past week said that the LME will eventually launch contracts in nonmetal products (amm.com, March 14).
Once LME Clear has regulatory approval and goes live, well have some of the best technology for clearing. As an exchange business with that infrastructure in place, plus we have connectivity from all the major firms already, why shouldnt we look at other thingsit doesnt have to be just metals, he said.
Phase one is taking a critical look at the market as it exists now and deciding what is failing and what is succeeding, whether we can improve the ones that are succeeding, should we weave out the ones that are not? Well see whether there should be new versions of contracts, like steel and Nasaac (North American special aluminum alloy contract), Jones said.
A second phase will include adding more options and premium contracts, and third and fourth phases would include looking at other commodities. The latter would probably require market makers and a new business model, Jones said.
Realistically, the strength of the exchange is in commodities and we have people looking at lots of alternatives, he added. We should bottom out the metals complex first because thats what we are good at; we have a high critical mass and we know all the clientsitd be crazy not to offer better services and linkages from there.