London Metal Exchange heads to China; prepares to list trading wherehouses on “The Belt and Road” routes

London Metal Exchange, a very prominent venue within the Square Mile which bridges the gap between ultra-modern, technologically advanced trading systems and the open outcry ring has made a further advancement in its direction of expansion, this time by looking toward the Far East, notably mainland China.

The days in which many electronic trading companies only viewed China as a vast expanse of retail business opportunity, with introducing brokers (IBs) conducting vast trading volume on behalf of their clients by providing portfolio management services, automated trading and everything that a retail broker offers, but sent all order flow and client monies to brokerages in the West which conducted the dealing service have certainly borne fruit for many, been a mystery to others due to the ‘closed’ nature of China’s business environment to firms outside of the mainland and has spawned multi-million dollar IBs across development towns from Shenzhen to Guangzhou.

As last year drew to a close, FinanceFeeds began to investigate methods by which the current method of doing business in China could evolve further, and with government participation, how Western institutional providers could establish relationships with exchanges and banks in China in order to provide wholesale liquidity or exchange trading services to mainland companies, which would then offer it to local clients, making Chinese business open to non-bank institutional providers, and not just the preserve of retail companies onboarding retail clients via IBs.

London Metal Exchange’s entry into China is indeed interesting, as it is not simply the establishment of a venue with partial government ownership in a major city such as Shanghai.

Instead, the firm has entered into strategic alliance with Henry Bath & Son Ltd, CMST Development Co Ltd and Mercuria Energy Trading to list warehouses for the LME’s new LMEshield repository in regions along China’s ‘The Belt and Road’ routes.

When Chinese leader Xi Jinping visited Central Asia and Southeast Asia in September and October 2013, he raised the initiative of jointly building the Silk Road Economic Belt and the 21st-Century Maritime Silk Road . Essentially, the ‘belt’ includes countries situated on the original Silk Road through Central Asia, West Asia, the Middle East, and Europe.

The “Belt and Road” initiative calls for the integration of the region into a cohesive economic area through building infrastructure, increasing cultural exchanges, and broadening trade. Apart from this zone, which is largely analogous to the historical Silk Road, another area that is said to be included in the extension of this ‘belt’ is South Asia and Southeast Asia.

Last year, President Xi Jinping visited England, in order to invest some $40 billion in furthering business ties between Britain and China.

In collaboration with a broad group of warehouse operators, physical commodity traders and financing banks, the LME has developed LMEshield to offer a secure and robust way to manage warehouse receipts in multiple countries.

This alliance focuses on the use of LMEshield in Belt and Road jurisdictions. In the first phase of the project, Henry Bath will list one of its warehouses as an LMEshield facility along the 21st Century Maritime Silk Road, with the support of CMST. Metal receipting and support will be provided by Mercuria. China Merchant Securities supports commodities financing in LMEshield locations along the Belt and Road routes.

At the launch, Garry Jones, CEO of the LME stated

“The infrastructure projects stimulated by China’s Belt and Road strategy have created significant demand for base metals and other commodities. This LMEshield initiative reinforces the LME’s position as a conduit flow between China and the rest of the world.”

In November last year, FinanceFeeds discussed this direction at length with institutional prime brokerage Advanced Markets, especially with regard to whether companies will take this route in future.

Yuhan Mo, the company’s Operations and Marketing expert, highlighted a very interesting dichotomy between the way that Advanced Markets handles its Chinese business.

Never mind IBs – Try full China-focused brokerages with dedicated connectivity

Whilst most firms operate an IB model, using referring partners to send business to brokerages, Advanced Markets utilizes its methodology as a prime brokerage and wholesale provider.

“We have a hosting facility at Equinix’s HK3 data center, and can assist with the setting up actual brokerages in the region and help those brokers efficiently expand into China.” said Ms Mo.

“Most traders in China experience platform freeze and latency when operating without this type of technology infrastructure. It’s important to remember that China’s censorship and firewall systems interfere with internet speed within the country, primarily due to the extra layers within the internet between China and the “outside world”. Because most brokers host their servers either in Europe or US, Chinese traders are having hard time getting a stable connection to their brokers trade servers and are often exposed to intermittent price interruptions and loss of trades, especially during volatile economic data releases”, continued Ms. Mo.

Natallia Hunik, Global Head of Sales at Advanced Markets explained to FinanceFeeds at the company’s office in Boston, Massachusetts that “At the moment, we are discussing opportunities with local Chinese exchanges rather than banks. It’s true that the existing exchange platforms may be very old and not at all appealing to the younger trader but, if you are sophisticated enough, then you can partner with the exchanges in order to provide trading facilities while, at the same time, utilizing technology such as ours to give the traders the type of access they desire.”

This is most certainly something which is now being pursued by institutional companies, with LMEshield having structured its new entry into China in this format.

Photograph: Inset: Shenzhen, China. Featured: Heng Feng Road, Shanghai, China. Copyright FinanceFeeds