For weeks after the LME made a mockery of capital markets, when it canceled a day’s worth of nickel trades and suspend trading for eight days in March after one of its biggish Chinese clients (who was short the shiny metal) faced near-certain default as the price of nickel exploded higher in an unprecedented short squeeze, many were wondering who was on the other side – who was the trader that had made a killing by taking on China's dumb money?
Today we finally got the answer when we learned that hedge fund Elliott Associates, which manages some $34 billion making it one of the world's largest hedge funds, is suing the London Metal Exchange (LME) for $456 million for cancelling nickel trades after the chaotic trading in March that forced the exchange to suspend its nickel market, the farcical LME said on Monday, having become the butt of all trader jokes in recent weeks, and is being probed by regulators as it struggles in vain to restore trust and volumes in its nickel market.
Elliott filed the suit through two vehicles against the LME and LME Clear, the exchange’s clearing house, on June 1 in England’s High Court of Justice, said LME’s owner Hong Kong Exchanges and Clearing on Monday.
Elliott sues hk stock exchange-owned LME in uk court for damage claim of US$456,391,500 pic.twitter.com/dyM49kwTIj
— R1 Investment (@R1_Invest) June 6, 2022
Elliott said the LME should not have halted trading and erased deals after prices more than doubled to over $100,000 a tonne in a matter of hours on March 8. An Elliott spokesperson told Reuters in an email that the LME had acted "unreasonably and irrationally in particular by taking into account irrelevant factors, including its own financial position".
Elliott Management, founded by conservative billionaire Paul Singer, did not say in the email what LME nickel positions it had when deals were cancelled.
The decision to suspend trading followed a 250 per cent surge in the price of nickel to a record $100,000 a tonne that was triggered by a short squeeze as banks and brokers rushed to close part of a large position amassed by Xiang Guangda, the billionaire founder of China’s leading stainless steel producer Tsingshan Holding Group.
The LME, the world's largest and oldest market for industrial metals, said it had to take action to protect the market as a whole when trading became disorderly. In a statement, the exchange said it had "an important role to play in ensuring the market is fair and orderly for all those who wish to participate".
It added that the nickel market had become disorderly, and that it had cancelled deals from midnight to 0815 GMT on March 8 in an attempt to return the market to the time when it had last been orderly.
"The LME therefore considers that Elliott’s grounds for complaint are without merit, and the LME will defend any judicial review proceedings vigorously.”
The last time the LME was sued was nearly a decade ago when Russian aluminium giant Rusal sought to derail proposed LME reforms aimed at easing huge backlogs to withdraw metal from its global warehousing network. The LME initially lost the case, but won an appeal allowing it to go forward and implement the reforms.
Last month, the LME proposed measures that it said would improve transparency and stability in the over-the-counter (OTC) metals market, including more frequent disclosures of all positions.
We doubt Elliott will be alone in taking the LME on in court: AQR Capital Management, one of the world’s largest hedge funds, was also exploring legal options in its dispute, the FT reported citing people familiar with the matter. The fund’s founder accused the LME of “reversing trades to save your favored cronies and robbing your non-crony customers”.
LME has denied that parent company HKEX influenced its decision.