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London Metal Exchange sued for US$456m by US hedge fund Elliott Management over nickel trades

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By Louis Allen - 

One of the world’s largest hedge funds, US-based Elliott Management has sued Hong Kong Exchanges and Clearing (HKEX)-owned London Metal Exchange (LME) for US$456 million, after it suspended and cancelled nickel trades in March.

According to the filing, the US hedge fund claims the trade cancellation was “unlawful on public law grounds” and “constituted a violation” of its rights.

The LME will have 21 days to file a response, where HKEX understands the exchange will contest the claims “vigorously” saying they are “without merit”.

Law firm HFW partner Sarah Taylor said the exchange may have been influenced by its parent company, HKEX.

“The basis of the decision to cancel those trades has been questioned and it has been suggested the decision was prompted by the interests of the LME’s parent company HKEX,” she said.

However, the LME has denied HKEX influenced its decision.

Under the LME’s rule book, it has the power to suspend trading and cancel trades in the “interest of maintaining a fair and orderly market”.

The LME, an ageing 145-year-old exchange and the world’s largest and oldest market for industrial metals, said it needed to take action to protect the market as a whole when trading became “disorderly”.

The exchange claims it has “an important role to play in ensuring the market is fair and orderly for all those who wish to participate”.

Cause of the surge

The decision to halt trading on 8 March came after nickel surged 250% in just two days to trade at over US$100,000 a tonne.

It is believed the price rise was triggered by a short squeeze as banks and brokers tried to close part of a large position gathered by Xiang Guangda, the billionaire founder of China’s leading stainless steel producer Tsingshan Holding Group.

In its filing, Elliott alleges the LME “acted unlawfully in that it exceeded its powers when it cancelled those trades, or that it exercised the powers that it did have unreasonably and irrationally”.

On top of this, it alleged the LME considered “irrelevant factors” and was naive to “other relevant factors” when making the decision.

The amount the LME is being sued for is made up of approximately 9,000t of nickel with a sale price of US$50,000/t.

This is the price nickel was reset to after the trades were cancelled, and differs from the peak nickel price reached on 8 March of US$100,000/t.

The metal is currently hovering at US$29,000/t.

Unhappy traders

The decision by LME to erase a day of trading due to the price surge left many traders in an uproar because the move caused profits to be eroded.

It’s being heavily anticipated that other lawsuits may follow from other hedge funds, which incurred losses on that fateful day in March; however, the three-month deadline to submit judicial review claims expires on Wednesday.

AQR Capital Management’s founder also accused the LME of “reversing trades to save your favoured cronies and robbing your non-crony customers”.