US hedge fund loses £360m legal challenge against London Metal Exchange

The LME cancelled about £9.5 billion in trades in March 2022 after major price fluctuations.

The London Metal Exchange suspended trading and cancelled some trades after the price of nickel spiked (Yui Mok/PA) (PA Archive)

The High Court has rejected an attempt by a US hedge fund to sue the London Metal Exchange for nearly half a billion dollars over its decisions when nickel prices spiked dramatically last year.

The court disagreed with Elliott Management’s claims that the LME did not have the power to cancel a series of trades.

The move cost Elliott about 456 million US dollars (£360 million) in lost net profits, the court in London heard. A second claimant, Jane Street Global Trading, said that it had lost around 15 million dollars (£11.8 million).

Elliott said it would make a bid to appeal against the decision.

This judgment raises fundamental questions for UK market participants, who trade not only on the LME but more broadly on other exchanges

Elliott Management spokesperson

The exchange’s managers suspended trading in nickel for a day in early March last year after an enormous spike in the price of the metal.

Nickel prices had already been volatile for about two weeks after the economic fallout of Russia’s full-scale assault on Kyiv.

But as managers woke on the morning of March 8, they saw that prices had approximately doubled since midnight.

Already the day before, a 69% rise in nickel prices had been nearly five times greater than the next biggest move in the last two decades.

Yet at the close of trading on March 7, the price was still below 50,000 US dollars per tonne. By 6.08am the next day prices had peaked at 101,365 dollars per tonne.

Facing unprecedented price moves with no obvious cause, the LME concluded that the market had become “disorderly” and suspended trading at 8.15am, the court heard.

A later report found that short-sellers – investors who bet that the price of a product will go down, rather than up – had built up large positions betting against nickel.

But as prices started to rise, traders began to try to make up for these bets by buying nickel, therefore offsetting their losses. But this caused nickel prices to rise further, putting even more pressure on short-sellers and prices spiralled.

This created what market watchers call a “short squeeze” – the same phenomenon that happened to GameStop shares in January 2021.

Later that morning, and faced with the potential collapse of several companies, the LME decided to cancel all the trades that had happened on the exchange since midnight.

The total value of the cancelled trades was about 12 billion dollars (£9.5 billion).

It meant that all the business that Elliott had done between midnight and 8.15am had to be reversed, leading it to miss out on big profits.

Elliott and Jane Street had no problem with the suspension, they said. But in a technical legal augment, they claimed among other things that the LME had acted unfairly by not consulting them prior to the cancellation.

In a ruling on Wednesday, Mr Justice Swift and Mr Justice Bright said that the “consultation was not expressly required” under the rules the LME follows.

The investors also claimed that the LME only had the power to cancel the trades to the extent permitted by “relevant procedures” that were not pertinent on the morning of March 8 2022. Again the court disagreed.

Elliott said: “This judgment raises fundamental questions for UK market participants, who trade not only on the LME but more broadly on other exchanges, about an absence of trade certainty prior to settlement, and about a lack of effective checks and balances on UK exchanges cancelling or varying trades in ways which may protect just one cohort of traders, or even the exchanges themselves.

“We therefore intend to appeal the judgment and will continue to seek redress for the LME’s unprecedented cancellation of trades in March 2022.”