The UK financial watchdog has fined the London Metal Exchange (LME) £9.2 million for having inadequate systems and controls to deal with a massive short squeeze in the nickel market three years ago.
It what is the first enforcement action taken against a UK recognised investment exchange, the Financial Conduct Authority (FCA) said the LME failed to ensure its systems and controls were "adequate to deal with severe market stress".
Between 7 and 8 March 2022, extreme volatility in the price of LME’s three-month nickel futures contract saw its price more than double the closing price on the previous day in little over an hour, leading to it suspending its nickel market for eight days and cancelling all nickel trades.
"These events undermined the orderliness of and confidence in LME’s market," the FCA said, with its systems and controls "not adequate to ensure orderly trading under conditions of severe market stress".
The regulator noted that during LME’s Asian session hours, from 1am to 7am GMT, only relatively junior trading operations staff were on duty and "had not been trained to recognise anything other than error trades or rogue algorithms as potential causes of a disorderly market" and so when price rises became increasingly extreme it was not escalated to senior managers.
The FCA said LME has worked to enhance and strengthen its controls and joint-director of enforcement and market oversight, Steve Smart, said: "London’s metal markets are of vital importance to the UK and global economy. We expect controls that match their significance. The LME should have been better prepared to address the serious risks posed by extreme volatility."