Red Kite’s Farmer Says LME Risks Damage From HFT and Rising Fees

(Bloomberg) -- High-frequency trading along with excessive fees and regulation risk hurting trading on the London Metal Exchange, according to one of the biggest commodity hedge funds.

The LME has sought to lure more algorithmic and high-frequency traders, which gives some traders an unfair advantage by allowing them to process order faster, Red Kite Group co-founder Michael Farmer said at speech at the LME's annual black-tie dinner in London. The exchange should lower fees and encourage a more level playing field, he said.

“It should not be a surprise if the consequence is that liquidity reduces and our marketplace is damaged," Farmer, 71, told about 1,900 executives, brokers and bankers gathered in the Great Room in Park Lane's Grosvenor House Hotel. “This may be part of the explanation why volumes are falling.”

Farmer, a five-decade veteran of the metals industry and member of Britain's House of Lords, is a high-profile addition to the discontent brewing among LME members. He balanced the critique with praise for the LME's reputation for good governance and trustworthiness of its warehouse and supply systems.

‘Great Supporter'

“Let me assure you, I am and have always been, a great supporter of the metal exchange and will continue to be so,” according to a copy of the speech obtained by Bloomberg.

The LME is fending off complaints about high trading fees and tighter regulation at the same time that trading volumes are set for the biggest annual drop since at least 2008, figures compiled by Bloomberg show. Some executives, including Martin Abbott, who orchestrated the LME's sale to Hong Kong Exchanges & Clearing Ltd., have explored alternatives to the exchange, citing costs and a disconnect between metal markets and users.

To read about why LME volume is down, click here

LME executives have responded to criticism, saying traders are blaming the exchange after a tough year for the entire industry. The current fee structure is not too high and the LME's market share in copper is the same as two years ago, Chief Executive Officer Garry Jones said in an interview last week.

“Members have had a very tough year, their volumes are down, their revenues are down,” Jones said in an interview last week. “You're starting to see difficult markets and you're starting to feel it more.”

Before the takeover by HKEx in 2012, the LME was owned by its members and the business strategy was to benefit them, rather than maximize profits. The new management has sought to turn the world's biggest metals exchange into a commercial operation by increasing fees and attracting new types of users.

"If costs of trading on the exchange are prohibitive, it will drive customers away and the golden goose will die of malnutrition," Farmer said. "There are many exchange competitors, and even some here in London, who are waiting in the wings and would be very happy to take over the mantle of the LME."

To contact the reporter on this story: Agnieszka de Sousa in London at atroszkiewic@bloomberg.net. To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net, Nicholas Larkin