The London Metal Exchange said on Tuesday it is possible to trade its new mini futures contracts via telephone and not just electronically as some in the metals market believed.
LMEminis due for launch on Monday are small, cash-settled contracts based on the main futures contracts, do not involve delivery of metals and will be for five tonnes rather than 25 tonnes for existing contracts.
"The primary use (of the minis) is on the electronic market ... But telephone trading has always been allowed, to give users the flexibility of different trading platforms," an LME spokesman told Reuters. "We've just made it more explicit."
The exchange said in a release on November 13 that the new mini contracts were tradeable on its Select electronic trading system and on the telephone. The mini contracts are expected to attract funds and other speculators making directional bets on metals prices.
But traders said problems with a new version of the LME's Select trading software earlier this month had raised some doubts about the success of the new contracts.
"We weren't aware they (the minis) could be traded on the telephone," an LME trader said. "They needed to be more flexible after the problems they've had."
The LME suspended Select trading on November 6 and 7 because of problems with the software, which traders said were linked to the new mini contracts and posed a risk to the competitiveness of the world's largest base metals market. No details of the problem were given, but the exchange decided to roll back to a previous version of the software.
However, during the outage traders worried about the loss of transparency and the incident has raised doubts about whether the LME's software can handle the volume the exchange is hoping to attract. Also the market is questioning whether the minis have a future given that the New York Mercantile Exchange is also due to launch its own version of these contracts at the same time.
Traders say NYMEX's Globex system has already shown it can handle large volumes, while the LME has yet to prove itself. However, whether the minis are successful also depends on the range of base metals investors want to trade, analysts said.
The LME's initial offering includes copper, primary aluminium and high grade zinc, while the only base metal NYMEX will be offering is copper. "NYMEX won't have an aluminium or zinc contract and that's a disadvantage," a London-based analyst said.
"I think the LME could be better placed because it is used to trading other metals and will have liquidity from the hedging done by producers and consumers."