(Bloomberg) — For nearly a century and a half — with only a handful of interruptions — the London Metal Exchange has been the place where world prices are set for industrial metals, from aluminum with zinc.

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At 8:15 a.m. on Tuesday morning, it stopped. The LME suspended trade in nickel, used to make stainless steel and electric vehicle batteries, after prices soared as much as 250% in two sessions. More shocking to many in the market: the exchange later announced that it would cancel all trades that took place in the hours leading up to the shutdown.

The LME was poised to restore order as the market was gripped by a classic short squeeze, fueled by panic from the world’s largest nickel producer, Tsingshan Holding Group Co., and its brokers to close a part of a large short position he had built. Over the month. But many brokers criticized the decision to first allow the market to open on Tuesday and then roll back completed trades.

“Shambolic, shameful, scandalous, calamitous, ruinous or choose any word you like,” said Michael Marlowe, director of Hythe Bay Metals Ltd. “Today was a blow to everyone who loves the LME and everyone who uses it to conduct their daily business.

For brokers at the LME, one of the few places in the world where traders still congregate in a screaming pit to bark orders at each other, Tuesday’s drama was a throwback to the stock market’s darkest days. . The last time the LME suspended trading of one of its contracts was during the ‘tin crisis’ of 1985, when an international cartel of producers collapsed after being unable to support the price of tin.

This crisis was a heartbreaking experience that changed the shape of the market. Many incumbent brokers have been forced out of business due to the losses and, according to LME lore, the stress of the crisis has shortened a number of lives.

On the nickel market, trade remains at a standstill. The LME issued a late notice saying it is unlikely to reopen before Friday. And even after the restart, it will keep the training wheels running – trading will only take place during European hours to begin with and with a 10% daily limit on price movements.

The exchange said it was also considering a mechanism to reduce short positions in the market before the restart, by “compensating” large holders of long and short positions on a voluntary basis.

During the tin crisis of 1985, the LME responded to the effective failure of the largest player in the market by conducting a so-called “ring-out” process. Open contracts entered into at the high prices listed on the LME at the time of the trading suspension were settled with reference to the much lower prices that were quickly seen subsequently in the physical market.

Some industry players had previously suggested that a similar fix was needed to avoid another frantic rally when the market reopens – such as when dominant long and short position holders agree to liquidate their positions at a fixed price.

“The LME needs to lock them in a room and tell them they’re not coming out until they come to an agreement,” said Malcolm Freeman, a broker at Kingdom Futures who started his career at the LME in 1974. . “It’s as simple as that.”

With nickel prices rising for weeks amid fears of disruption from Russia’s main supplier, this week’s jaw-dropping price surge was sparked when holders of short positions, including major producer Tsingshan, pulled out. rushed to close them.

restore calm

To restore calm to the market, it will be crucial to resolve the situation around Tsingshan and its brokers. If the Chinese group can pay its brokers’ margin calls or otherwise find a way to liquidate its positions, the market may be able to reopen in an orderly fashion.

Chinese tycoon Xiang Guangda, who controls Tsingshan, had built a massive short position in nickel and faced billions of dollars in market price losses after the spike, according to people familiar with the matter. He had closed part of his firm’s short position and was considering exiting the bet altogether, Bloomberg reported earlier. Tsingshan is struggling to pay margin calls to its brokers and has come under increasing pressure to honor payments in recent days, people familiar with the matter said.

Traders must regularly deposit cash, called “margin”, with their brokers to cover potential losses on their positions. Brokers in turn must hold margin with the clearing house, LME Clear. If the market moves against these positions, they receive a “margin call” asking for additional funds – and if they don’t pay, they may be forced to close their position.

Prices surged during Asian hours from around $50,000 to over $100,000 a ton before the LME announced its suspension. He later said that all trades that took place after midnight in London would be cancelled.

“You just can’t do what LME did,” said Alex Gerko, the founder of XTX Markets, one of the exchange’s leading electronic market makers, on Twitter. In a tweet that was later deleted, he said it was “the end of the market”.

Others were more supportive of the LME’s position, but still had questions about its timing.

“I think it was probably the right decision to take a step back,” said Tiberius Group CEO Christoph Eibl. “Was it the right decision to do this during trading hours? Or would it have been fair to close, maybe even not open, on Tuesday?

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