On 19 March 2025, the Financial Conduct Authority (FCA) issued the London Metal Exchange (LME) with a Final Notice, imposing a financial penalty of £9,245,900 following the LME's failure to maintain orderly trading during a period of extreme market stress in March 2022, particularly concerning the three month nickel futures contract. The LME agreed to resolve the case at an early stage and qualified for a 30% discount on the penalty imposed.
Background to the findings
The LME, renowned as one of the world's largest markets for industrial metals, experienced unprecedented volatility in its three month nickel contract between 4 and 8 March 2022. The price of nickel more than doubled, severely disrupting the market and threatening the default of multiple LME Members. The LME suspended its nickel market from 8 March to 16 March 2022 to address the disorder and cancelled all nickel trades that took place on 8 March.
The FCA's investigation revealed that the LME's systems and controls were inadequate to manage such volatility. Given the strategic position of the LME in the metals market, this represented a "significant risk" to the wider economy.
The FCA's case
The FCA found that the LME breached its regulatory obligations under the Markets in Financial Instruments Directive II (MiFID II) by failing to ensure its trading platform could cope with severe market stress. The LME's policies, controls, and training programmes did not adequately prepare staff to recognise and escalate situations of market disorder.
Under MiFID II, it was mandatory for algorithmic trading platforms like LMEselect, the electronic platform used to execute trades by LME Members, to have automatic volatility control mechanisms to halt or constrain trading in order to mitigate the risk of market disruption. The LME's automatic volatility controls, known as dynamic and static price bands, were intended to protect investors from risks arising from extreme volatility. The price bands created an upper and lower limit for trade prices, with orders outside of these price ranges being refused entry to the platform. The LME's Trading Operations (TO) team, responsible for oversight of the market and the monitoring of conditions, could adjust the width of these price bands to accommodate varying levels of market volatility.
However, the LME treated these controls primarily as measures against error trades and rogue algorithms, neglecting their broader role in ensuring orderly trading under severe market stress. The TO team viewed their responsibility as simply to ensure that genuine trades could take place without technical obstructions intervening and they were not trained to recognise or deal with market issues which had arisen while the market was functioning properly.
Furthermore, during LME's early trading hours, from 1:00am to 7:00am GMT, only relatively junior TO staff were on duty. Although these junior staff were aware that they could raise issues with their senior colleagues in London, they had not been adequately trained as to when this was necessary. Instead, without consulting with the senior team, the junior TO staff would manually suspend the price bands during times of high volatility, to ensure that trades on the market could proceed without interruption. This practice, and the risk to the wider market that it posed, had been flagged in an internal incident report in 2021, but no immediate remedial action was taken.
A lack of adequate controls in relation to the automatic volatility controls, combined with the failure to sufficiently train junior staff to spot market issues and escalate matters, came to a head during the early hours of 7 March. As the price of nickel contracts soared, the TO team initially responded by widening the price bands to keep pace with the rising market. Over the course of the day, in response to increased margin calls, the TO team suspended and reapplied the price bands several times – without alerting senior managers.
Once the senior managers became aware of the extent of the price volatility, there was a recognition that if the price continued to rise there would be a need to suspend market activity. However, this was not communicated overnight to the Hong Kong based junior members of the TO team; nor were they instructed to make emergency calls to the senior members of the team if the price rose considerably. During the early hours of 8 March, the junior members of the TO team suspended the price bands again, allowing all trades to progress freely. As a result, the price of the three month nickel contract reached a high of $101,365 – up from just under $30,000 the previous day. Once the board members and senior management in London woke up and discovered what was occurring, an immediate decision was made to suspend the nickel market. Had this not occurred, the margin calls required would likely have triggered multiple LME Member defaults. Later that day, the LME further published that it was cancelling all trades which had occurred on 8 March, as they had taken place in a 'disorderly' market.
It was incredibly concerning to the FCA that the price bands had been entirely suspended for over three hours during the early-morning trading on 8 March – effectively, no automated market controls were operating during a time of extreme volatility, on the basis of decisions made by juniors. In addition, senior managers were not even aware that this had been the case when they decided to suspend the market on 8 March – they only became aware the following day, on 9 March.
Mitigating and aggravating factors
The FCA acknowledged that the LME had taken steps to address the issues identified, including commissioning an independent review and implementing an action plan to enhance its volatility controls. These measures were seen as mitigating factors in the FCA's decision. However, the FCA also noted aggravating factors, including the LME's provision of inaccurate information to the FCA regarding the calibration and suspension of the price bands. The LME did not inform the FCA until 19 May 2022 that the price bands had been suspended on 8 March. This failure to promptly inform the FCA of relevant breaches was considered an aggravating factor, although the FCA did not allege deliberate misinformation.
Comment
The FCA's decision to impose a substantial financial penalty on the LME underscores the critical importance of having robust systems and controls to maintain market orderliness. This enforcement action highlights the necessity for exchanges to develop comprehensive policies and implement training programmes that enable staff to recognise and respond effectively to market stress. However, the FCA has made it clear that market operators must reinforce these policies by ensuring their effectiveness through the establishment of clear communication channels.
This decision represents the first enforcement action the FCA has taken against a UK recognised investment exchange (RIE). Steve Smart, joint executive director of enforcement and market oversight at the FCA, commented:
"London's metal markets are of vital importance to the UK and global economy. We expect controls that match their significance. The LME should have been better prepared to address the serious risks posed by extreme volatility."
UK RIEs have an important role to play in the regulation of markets. That role is quasi regulatory in nature and includes market monitoring and the taking of disciplinary action against users of the exchange for breaches of the RIE's rules. However, this case serves as a reminder that RIEs are themselves regulated and can be subject to disciplinary action by themselves. As the LME continues to implement its action plan, the FCA's decision represents a crucial step in reinforcing the standards expected of RIEs that are vital for maintaining orderly and transparent trading environments.