CME steps up battle against LME with new aluminum contracts

CME Group has made major strides in its competition with the larger London Metal Exchange in recent years after strong growth in its copper futures and options contracts, and it’s now looking to replicate that expansion in aluminum, the most widely used base metal. It’s also been offering incentives to traders to boost its less-popular aluminum futures contract, seeking to capitalize on the controversial halt on trading in the LME nickel market last month.

The LME is the global hub for futures and options trading, but it’s faced long-running criticism that its complex system of daily contracts is off-putting to new users, particularly algorithmic trading firms that are a dominant force in the U.S. commodities markets. Copper options have proven particularly fertile ground for CME with many users lured by lower fees and simpler monthly contracts.

Now, some of the LME’s most loyal supporters are weighing the alternatives in the wake of the exchange’s decision to halt trading and cancel billions of dollars worth of transactions to rein in a runaway short squeeze last month. The move sparked fury among investors and traders, and has prompted a sharp decline in trading activity as they exit the market. U.K. regulators are also investigating the LME’s handling of the crisis.

“We welcome the introduction of this new aluminum option contract and CME Group’s efforts to enhance risk management capabilities in base metals,” Rob Sorrentino, President at Eckhardt Trading, a Chicago-based systematic commodities trading firm, said in a CME statement announcing the launch on Tuesday. “The new contract provides even more flexibility to manage adverse price movements and transparent price discovery, which benefits the entire base metals industry at this critical time.”

The CME options contracts will be launched on May 23, pending regulatory approval, the exchange said. While it’s moving quickly to expand in aluminum, for now it’s staying tight-lipped on whether it has plans to move into new base-metal markets like nickel and zinc, in a move that would offer a more fully-fledged alternative to the LME.

“We’ll be very thoughtful about adding new contracts,” Young-Jin Chang, head of metals at CME Group, said in an interview. “Throwing the spaghetti at the wall and seeing if it sticks is not the way we approach things.”