Hedge Fund Sues London Metal Exchange Over Cancelled Nickel Trades

    Photo: Reuters [via The Guardian]

    The Facts

    • The US-based hedge fund Elliott Management has filed a lawsuit against the London Metal Exchange (LME) seeking $456M in damages regarding the cancellation of nickel contracts and trading in March.

    • The suit, which was filed in England's High Court last week, alleges that the LME acted "unreasonably and irrationally" when it canceled trading in nickel contracts on Mar. 8 and suspended trading for eight days.

    The Spin

    Narrative A

    A Chinese billionaire recklessly tried to corner the market in nickel while investors like Elliott Management bet on an increase in the price of the metal. The LME had to step in to ensure the stability of the market and the survival of some key players and producers. That's what a market maker does.

    Narrative B

    The LME reversed trades to benefit its insider cronies at the expense of the investors who provide liquidity to the global metals market. Better capitalization and less concentration are needed - both of which are served by protecting investors instead of market manipulators.

    Cynical narrative

    The real villain in this story - as in most stories of financial disaster - is derivatives. The LME was blind to the real threat facing the nickel market because the bulk of trading is done in derivatives, not in actual commodities, and those positions lack transparency for market makers like the LME.

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