The UK Financial Conduct Authority (FCA) has imposed a fine of £9.2 million on the London Metal Exchange (LME) due to inadequate systems and controls in place to handle extreme market stress. This situation came to a head during a week in March 2022 when the price of the LME’s 3-month nickel futures experienced significant volatility.
From March 4 to March 8, 2022, nickel prices soared dramatically, reaching over $100,000 in the early hours of March 8. This figure represented more than double the price from the previous day, with a bulk of this surge occurring within a short interval. Such volatility raised concerns about the overall orderliness and trust in the trading environment provided by the LME.
In response to these market conditions, the LME suspended nickel trading for eight days and invalidated all trades executed on March 8. An investigation revealed that the LME’s existing protocols were insufficiently equipped to ensure orderly trading during such extreme market events. Notably, the exchange lacked proper controls and policy frameworks concerning its automatic volatility controls, including the ‘price bands’.
Decisions regarding market stability were to be made exclusively by designated senior managers, yet the mechanisms for alerting these individuals to unusual or potentially perilous market situations were found lacking. During the LME’s Asian trading hours, which occur from 1 am to 7 am GMT, only junior staff members were present. These employees had not received adequate training to identify various indicators of market disorder beyond simple mistakes or faulty algorithms.
Consequently, as the nickel prices skyrocketed in the early morning hours of March 8, the situation was not escalated to senior management. Instead, operational staff attempted to manage the soaring prices by disabling the price bands just as volatility peaked.
This oversight significantly contributed to the rapid price increase of the 3-month nickel futures contract, exposing investors and market participants to heightened risks that the aforementioned price bands were intended to mitigate. The regulatory authority did acknowledge subsequent improvements made by the LME since the March 2022 incidents aimed at strengthening their control mechanisms.
This enforcement action is notable as it marks the first time the FCA has taken such measures against a UK-recognized investment exchange. The LME has accepted the findings and, as a result, qualified for a 30% reduction in the fine imposed by the FCA.