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The LME uses a number of mechanisms to help manage excessive price volatility and avoid erroneous order entry:

  1. Daily price limits
  2. Static price bands
  3. Dynamic price bands

All contracts use dynamic price bands and either daily price limits or static price bands, and here we describe what each are, how, where and when they are used.

The LME also recently consulted on the introduction of the DPL Multiple Day Framework in Consultation 23/235, which will go live on 28 June 2024. This deterministic framework aims to provide clarity to market participants on the actions the LME will take where a particular metal contract is impacted by DPLs multiple days in a row in the same direction.

What is a daily price limit?

A daily price limit is the maximum allowable amount (expressed as a percentage) that the price of a contract can rise (“limit up”) or fall (“limit down”) in a trading day.

Only bids below (the “limit up”) and offers above (the “limit down”) the price limits are permissible in a trading day. Once a limit has been reached, the LME may declare that a disruption event has occurred, within the meaning in notice 22/092, to address the impact of the operation of daily price limits on the establishment of LME Official Prices and LME Closing Prices in certain circumstances.

Daily price limits are expressed as a fixed percentage either side of the previous day’s 3-month  for that contract. Changes in applicable percentages are notified to the market by notice and the LME reserves the right to recalibrate these percentages periodically.

To which metals and prompts do daily price limits relate?

At the LME, daily price limits apply to all prompts for all physically settled base metals contracts, as well as the cash-settled cobalt contract, LME Cobalt (Physically deliverable and cash-settled contacts) .

Contract  Current 3M outright daily price limit 1
LME Aluminium 12%
LME Copper 12%
LME Zinc 15%
LME Nickel 15%
LME Lead 15%
LME Tin 15%
LME Aluminium Alloy 15%
LME NASAAC 15 %
LME Cobalt (Fastmarkets MB) 15%

1 All DPLs (for all prompts) are calculated basis the previous night’s 3-month closing price, applied equally to all prompts on the curve

For more details on the LME’s daily price limits, see notices:

24/134 (PDF) 
23/235 (PDF)
22/064 (PDF)
22/067 (PDF)
22/092 (PDF)
23/120 (PDF)

 

What are price bands?

Whereas daily price limits determine how far a price can go up or down in a trading day, price bands create a "price channel" by setting the allowable maximum high bid price and the minimum low offer price around a reference (or "anchor") price which updates intra-day. There are two types: dynamic and static.

What are dynamic price bands?

Dynamic price bands move in line with a contract’s last traded price, plus or minus a USD value (which is a multiple of the NCR values), and are updated in line with market activity on the basis of every last “good” trade (subject to a tick tolerance). Orders outside this range will be rejected by LMEselect.

They are designed to be operational at all times during the trading day and will not be suspended except in the event of technical difficulties.

For dynamic price bands, the price channels can be adjusted between three pre-determined width options during the trading day to allow for increasing or decreasing market volatility. In particularly volatile conditions in base metal contracts, the price channels can also be adjusted to a “Widest” setting to ensure that the dynamic are in operation at all price levels until such time as the daily price limit is reached, if applicable.

For more details on the LME’s price bands and how they are operated see:

LMEselect NCR values (PDF)

Price Bands and other Volatility Control Mechanisms (PDF)

What are static price bands?

Static price bands create a limit above and below a contract’s “anchor” price which is refreshed on an hourly basis. No bids or offers will be accepted outside of this range.

If a contract trades to either of the static price band limits (up or down) the market remains open, but only bids below, or offers above the limit (depending which one has been hit) are permissible until the anchor price has refreshed and the limits recalculated.

Static price bands are applied to all cash-settled contracts, excluding LME Cobalt (Fastmarkets).

Static price bands are designed to be operational at all times during the trading day and will not be suspended except in the event of exceptional circumstances. Intraday amendments to static price bands will only take place in exceptional circumstances if it is deemed to be in the best interests of the market to do so.

Volatility control mechanism by venue and contract

  LMEselect   LMEsmart  The Ring
Base metals + CB* 
(See above for full list of metals with DPL)

 Outright  DPB DPL   DPL  DPL
 Carry  DPB  -  -  -
 Options  DPB  -  SPB  N/A
Other contracts  Outright  DPB  SPB  SPB  N/A
 Carry  DPB  -
 DPB  Dynamic Price Band 
 SPB  Static Price Band 
 DPL  Daily Price Limit
 *CB  LME Cobalt (Fastmarkets MB)
Not available in the Ring

In cases where multiple controls are enabled for an instrument, the most stringent rule will be applicable.

Illustrative examples

Below are illustrative examples of how the suite of current volatility control measures are applicable on the LME market.

Interaction of dynamic price bands and daily price limits

  • Figure 1 below illustrates the interaction between dynamic price bands (DPB) and daily price limits (DPL)
  • The dynamic price band levels update based on trading activity on the basis of every last “good” trade (subject to a tick tolerance)
  • As the price nears the DPL, the DPL becomes more constrictive (than the DPB) and the price cannot go higher despite the DPB being higher than the DPL.

Figure 1 - dynamic price bands

Note: the figures and levels are purely illustrative, and the visuals are not to scale.

Interaction of static price bands and daily price limits

  • Figure 2 below illustrates the interaction between static price bands (SPB) and daily price limits (DPL).
  • The static price band level are refreshed on a periodic basis (currently hourly), based on the metal’s “anchor price”
  • As the price nears the DPL, the DPL becomes more constrictive (than the SPB) and the price cannot go higher despite the SPB being higher than the DPL.

Figure 2 - static price bands

 

Note: the figures and levels are purely illustrative, and the visuals are not to scale.

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