7 ms·

Desynchronization of nickel production and consumption

60 points by riemannzeta 5y ago

Confiks 5y ago
"The [London Metal Exchange’s] history dates back to the early 19th century, when metal traders drew a circle in the sawdust on the floor of the Jerusalem Coffee House in the City of London. Today, in addition to its electronic market, it’s one of the last exchanges where brokers still gather in person to yell orders at one another for part of the day." [1] [2] [1] https://www.bloomberg.com/news/articles/2022-03-14/inside-nickel-s-short-squeeze-how-price-surges-halted-lme-trading https://www.bloomberg.com/news/articles/2022-03-14/inside-ni... [2] https://www.youtube.com/watch?v=VOvA5HWdbmc https://www.youtube.com/watch?v=VOvA5HWdbmc
joebob42 5y ago
The fact they rolled back hours of trades is astounding to me. I'm surprised it would be legal, to be honest.
- labster 5y ago
  Why? Everyone agrees it was a short squeeze that led to predatory pricing. It’s a much bigger social good to reverse transactions than to bring charges against all the sellers for price gouging.
  - jdhn 5y ago
    I'm tired of people supporting bailouts under the guise of "social good".
    - HWR_14 5y ago
      I'm fine with supporting bailouts for the social good. I just think that the shareholders of the bailed out companies and executives should personally lose assets. Not necessarily sufficiently to pay for the bailout but to act as a real discouragement.
      - labster 5y ago
        They did and will lose money on their bets, just not ridiculous amounts that don’t reflect the real market price. Also the bailouts we’re talking about here are loans to nickel miners to cover margin calls, not free money. They will make money selling nickel at a higher price.
        Lionga 5y ago
        And you are the chosen one to decide which prices are real and which are not "real"?
        labster 5y ago
        Yes, that’s me. First time anyone has recognized me. One of my rules is that prices that have increased by 3 times in a few hours with no real change in demand and most suppliers still producing, then it’s not a real price.
        mynameishere 5y ago
        Anytime someone places a short position they are creating demand in the future from themselves. They know this.
        HWR_14 5y ago
        The problem was the callable short. They had nickel coming in N months. They could fulfill it then. They just couldn't take a short position that would be fulfilled then - instead it had to be fulfilled randomly before then.
      - chii 5y ago
        > the shareholders of the bailed out companies ... should personally lose assets if shareholders lose assets, then it's not a bailout. If they get bailed out, then they aren't losing assets. You're talking about the same coin, viewed from different angles. What you wish to accomplish - the shareholders taking a haircut, but for third-parties such as customers or general public to not take one, is impossible.
    - athrowaway3z 5y ago
      You're type of reply is common with people who assume the free market is real and that the rules prohibit interference. Neither has ever been true. Its just a theoretical ideal some people in government argue in favor off. Food subsidies are bailouts under the guise of "social good", in some places they prevent people from starving.
      - jdhn 5y ago
        Your type of reply is common with people who want to avoid the very real question of why the rules are bent when trades go wrong for certain people. Please tell me why you think somebody who shorted nickel so heavily to the point that they almost went broke deserves a bailout.
  - joebob42 5y ago
    Is price gouging in this context illegal (genuine question, I know very little in this area, but I would not have thought so). It seems to me like they are effectively just selling at the price the market will bear, which is artificially inflated at present.
  - OrangeMonkey 5y ago
    In what way can one force someone to sell at a price you want them to. Is it price gouging if I refuse to sell to you a commodity that you really want if I think I can get more out of it? Is there such a thing as price gouging for metals and is that illegal?
    - throwaway6532 5y ago
      The short sellers got margin called, so they are forced to buy Nickel to cover their short positions.
      - mrleinad 5y ago
        Well, it's part of the game, isn't it? Or if I buy and expect it to go higher, they'll rollback and reimburse me if it falls?
        lbarrow 5y ago
        The exchange being able to roll back trades in extraordinary circumstances is also part of the game. The exchange obviously has a strong incentive not to abuse this power or the traders will find another exchange.
        djbebs 5y ago
        It really isn't, and the fact that this is the first time it has happened shows that its not.
      - daniel-cussen 5y ago
        If your team loses the basketball game, the rest of your high school hates you. If you lose your job, you lose your health insurance. If you bet on the wrong part of the roulette wheel, you lose your chips. If you miss your rent, you get evicted. In all these endeavors, if you screw up you suck up the consequences, end of story. I feel literally no pity for traders who got margin called, they're forced to buy nickel to cover their short positions but they're just not worthy victims, they're debtors. And these are expensive people, these traders took out those loans to buy proof of their superiority, like cars, houses, jewelry for wives and affairs, investment-type goods like watches...maybe one of them was smart enough to buy Magic cards, but if they get short-squeezed, I doubt it. To my knowledge these traders are consenting adults, 18 and up surely, they gambled and won and took their money, this time they gambled and lost. They have to pay, with nothing but silence from them.
  - renw0rp 5y ago
    So why do we even allow entities which are not interested in actually delivering/receiving physical goods to trade futures? Genuine question
    - robbiep 5y ago
      Market makers have an important function in providing liquidity even in the absence of underlying asset. However this can create unusual and aberrant situations that certainly warrant raising these sort of questions in order to determine appropriate regulations and rules
      - krageon 5y ago
        This is an expensive way to say "they give you money maybe, even for nothing". That last part is the problem - if that is their core role, they should not exist. Even if they make some folks a lot (more) money.
        erincandescent 5y ago
        Market Makers are basically the financial system's buffers: they exist to make sure that you can always buy or sell a given security/commodity. They are the people who make buying or selling something _immediately_ possible, rather than having to wait for someone who needs what you're selling (or is selling what you're buying) to come along. This makes trades move quickly, which speeds up price discovery. This is good for market health. Market makers make their money on the difference between the buy-sell spread. Of course, this is a bet: if the market moves against them, they can lose money on this. Often a market has one or more officially designated market makers who are paid to _always_ have a certain number of both buy and sell offers on the market to ensure that there is always liquidity. The payments help cover their risk (These payments are often also materialized in the form of a "takers fee", i.e. a surcharge you pay whenever you place an order into the market which can be immediately filled) TL;DR: They're a warehouse which will always buy and sell some product, except when talking futures we're talking wagons full of nickel 1 month from now and so the warehouse doesn't physically exist
  - rollypoll 5y ago
    I dont think you understand how markets or exchanges work
- lbarrow 5y ago
  I think it's basically just replacing having a circuit-breaker -- if they had a circuit breaker like a lot of other exchanges, the crazy price jump never would have gotten going.
  - Ekaros 5y ago
    I don't think circuit breakers should exist. And markets should operate 24/7. There is absolutely no good reason why they wouldn't in digital age. Players should not make bets where they can lose too much money.
    - kasey_junk 5y ago
      Any short position can lose infinite money, so this argument is equivalent to saying short positions should not exist. Saying short positions should not exist is equivalent to saying commodities producers should not be able to hedge production risk. That has wild implications for commodity prices and availability around the world. If that’s your position you should probably state it more directly.
      - jamesrom 5y ago
        You can hedge short positions. Ekaros is saying that traders shouldn't rely on things like circuit breakers or rollbacks to save them when they make a bet with too much on the line.
        kasey_junk 5y ago
        In this case the hedge was going the other way. They hedged their real long position with short futures. The market broke and they were in a position where they were losing money as the price of their real asset was sky rocketing. This is because of the natural limits of hedging short positions. Circuit breakers aren’t designed to protect traders from betting too much, they are designed to prevent the market itself from breaking in unforeseen ways.
      - Ekaros 5y ago
chii 5y ago
i'm also surprised this hasn't really be covered in much mainstream media at all, unlike the robinhood fiasco. A good video summary of the events (if you don't want to read a lengthy article : https://www.youtube.com/watch?v=tHXF5LyLI4M https://www.youtube.com/watch?v=tHXF5LyLI4M )
- owyn 5y ago
  This is unrelated to the parent topic directly, but I just read that article in 6 minutes. I saw this comment before I actually read the article, so I was reading at a normal speed rather than just skimming, to retain enough that I feel like I could explain it to someone else if I had to. That video is 20 minutes long! I know people seem to prefer to consume information from a video vs just reading about it but it kind of struck me that the article was described as "lengthy" and the video was described as a "summary". The robin hood fiasco presumably made more of a main stream impact because it was a "fun" human interest story rather than just a dry technical thing that was a problem, then got fixed, and most people never cared about and definitely will never remember a year from now. Basement dwelling internet nerds win big over wall street! vs Over leveraged Chinese mining company gets a loan!
  - chii 5y ago
    The article links to another article (https://www.symmetrybroken.com/the-problem-of-synchronization/ https://www.symmetrybroken.com/the-problem-of-synchronizatio...) which you will also want to read to get the full scope (as it introduces more ideas outside of the nickel issues). The video is specifically about the nickel issue. As for it being 20 mins, i argue that it's only longer because speaking is so much slower. The informational content is less in the video. And i also recommend watching videos at 2x speed!
- duped 5y ago
  It was on Marketplace (APM/NPR) and CNBC yesterday. That's as mainstream as financial news gets.
ada1981 5y ago
Is there any reason to not just have limits on how much a market can move every day by default?
- kasey_junk 5y ago
  Most exchanges have circuit breakers. LME is old fashioned in lots of ways and being late to circuit breakers is one way. They’ll have them going forward.
- deleted 5y ago
  [deleted]
- deleted 5y ago
  [deleted]
- dragontamer 5y ago
  Sure, and the past week is proof of the folly of daily limits. LME has added limits. So every day, the nickel market opens, drops 8%, and then closes immediately. No one gets to trade, because everyone knows the price of Nickel hasn't reached its "logical" value yet. So these price limits are a de-facto long-term close of the market until the dollar value matches what people want. So in effect, you've closed the market for days (weeks?) since no trading activity takes place to "correct" the price shock. ---------- I mean, its a terrible situation for the nickel market, but I don't think hard price limits like this are a good idea either. After closing the market for a week (presumably long enough to fix whatever political-glitch was going on), it would have been better to just let the price float to whatever it was, instead of this "lurch 8%, close the market" kind of situation.
SilasX 5y ago
This piece feels ... confused. It starts off with casually assuming that pricing mechanisms "just don't work" for a commodity, which sets a bad tone, but is forgivable if it can deliver. But then I got to this part[1]: >What caused the price spike? The largest nickel producer in the world, a Chinese company called Tsingshan, was short nickel because it had made a huge capital investment and was set to produce 40% more nickel in 2022 than it had in 2021. ... But what if prices go up? Isn't a short dangerous? Not really if you're short nickel and you're a nickel producer. ... Your shorts are "covered" rather than "naked," so your losses are limited. Okay, so far so good: Tsingshan took a short position, which was safe, because it's covered, by virtue of them being a producer of the underlying (nickel). >They're limited, that is, so long as you can deliver nickel against the contracts. But what happens if ... closing your short is going to require you to deliver $10s of billions of nickel, and you're going to have to come up with $1s of billions immediately because of margin calls. You don't have that kind of cash on hand, and you can't deliver a huge chunk of your production up immediately against those short contracts. So ... the shorts weren't actually covered, and you can expect to suffer huge losses if the price goes up. I still don't see the case for voiding the transactions, since the price movement was responding to real macroeconomic phenomena, and the short-seller couldn't actually cover. [1] I've cut out large pieces of the quotes to get the point quickly, while doing my best to preserve the meaning
- lbarrow 5y ago
  I agree with you on the limitations of the article, and I can see the rise in nickel prices due to the war as "real macroeconomic phenomena", but the short squeezes on nickel produces clearly created a positive feedback loop that pushed the price way higher than the fundamentals justified. Voiding the transactions here serves the same purpose as a circuit breaker on a stock exchange: to prevent temporary pricing feedback loops from causing chaos. If the LME had a circuit breaker (and I'm sure they'll be getting one soon), this wouldn't have even come up.
- kasey_junk 5y ago
  I largely think it was a mistake to break the trades. That said you can make a logical argument for it if you presume that the LME thinks their job is to act as a price discovery mechanism for “real” nickel instead of acting as a bastion of the LME nickel futures contract. Nickel in the real world does not actually meet the contract specs very often (this is true of most commodities). The bigger issue than the liquidity position of Tsingshan is that they produce nickel that doesn’t meet the LME contract spec. They aren’t perfectly hedged due to this, but they continue to be a major driver of nickel prices in the real world. So if the market was orderly their nickel production should trivially offset any short position they have (and it did with a day or two of looking for financing). From the LME’s perspective, letting Tsingshan, a producer with no evidence of trouble producing nickel fail because of a quirk in the matching engine of LME, when the macro factors should be making them tons of money, is dramatically worse for the natural nickel market than breaking the trades of the speculative participants. In any commodities market the speculative participants dominate the order volume, but the real producers and consumers are the backbone of the price discovery mechanism. If Tsingshan pulled all their future volume out of the LME due to this, it would both destroy the market and hinder future price discovery for nickel. It’s understandable that the LME would take extraordinary action to prevent that. The real question is why they didn’t have circuit breakers in the first place, and thats mostly a culture issue.
lokar 5y ago
As always, the most informative and best written source for a financial story is Matt Levine: https://www.bloomberg.com/opinion/authors/ARbTQlRLRjE/matthew-s-levine https://www.bloomberg.com/opinion/authors/ARbTQlRLRjE/matthe... Read the past week. Subscribe for free via email if you have even a passing interest in financial markets.
- Tenoke 5y ago
  Matt Levine is generally great, the nickel coverage was great but if you read those posts you'll also see the sections where he keeps writing about how Russia will default on its debts. Then when the opposite happened he didn't even comment on the conclusion of that previously important topic let alone admit there must've been faults with his analysis. Big portions of his readers might not even learn he was wrong and this kind of blatant sweeping of wrong conclusions under the rug makes authors look much more accurate than they are.
  - rollypoll 5y ago
    He may still be right...
  - axg11 5y ago
    Did Levine set a timeline for Russia defaulting on its debts?
    - Tenoke 5y ago
      Yes, last week for example here[0]. >I guess Russia is going to default on its debt >Yeah, I don’t know, I mean. If Russia doesn’t pay interest tomorrow, or pays it in rubles, will that “shut the country out of most funding markets”? >So the likely outcome is that Russia will not pay interest on those bonds, or will pay it in rubles. And then those bonds will be in default. And Russia will say “we’re not really in default; our default was caused by the mechanics of the international financial system, not by our unwillingness or inability to pay.” and so on. Except Russia paid their debts the next day and didn't default. Apparently he has actually later mentioned that they paid but mostly just as something that's confusing him why so part of my criticism was unwarranted. 0. https://www.bloomberg.com/opinion/articles/2022-03-15/amc-bought-a-gold-mine https://www.bloomberg.com/opinion/articles/2022-03-15/amc-bo...

60 points by riemannzeta 5y ago

"The [London Metal Exchange’s] history dates back to the early 19th century, when metal traders drew a circle in the sawdust on the floor of the Jerusalem Coffee House in the City of London. Today, in addition to its electronic market, it’s one of the last exchanges where brokers still gather in person to yell orders at one another for part of the day." [1] [2] [1] https://www.bloomberg.com/news/articles/2022-03-14/inside-nickel-s-short-squeeze-how-price-surges-halted-lme-trading https://www.bloomberg.com/news/articles/2022-03-14/inside-ni... [2] https://www.youtube.com/watch?v=VOvA5HWdbmc https://www.youtube.com/watch?v=VOvA5HWdbmc

joebob42 5y ago

The fact they rolled back hours of trades is astounding to me. I'm surprised it would be legal, to be honest.

labster 5y ago
Why? Everyone agrees it was a short squeeze that led to predatory pricing. It’s a much bigger social good to reverse transactions than to bring charges against all the sellers for price gouging.
- jdhn 5y ago
  I'm tired of people supporting bailouts under the guise of "social good".
  - HWR_14 5y ago
    I'm fine with supporting bailouts for the social good. I just think that the shareholders of the bailed out companies and executives should personally lose assets. Not necessarily sufficiently to pay for the bailout but to act as a real discouragement.
    - labster 5y ago
      They did and will lose money on their bets, just not ridiculous amounts that don’t reflect the real market price. Also the bailouts we’re talking about here are loans to nickel miners to cover margin calls, not free money. They will make money selling nickel at a higher price.
      - Lionga 5y ago
        And you are the chosen one to decide which prices are real and which are not "real"?
        labster 5y ago
        Yes, that’s me. First time anyone has recognized me. One of my rules is that prices that have increased by 3 times in a few hours with no real change in demand and most suppliers still producing, then it’s not a real price.
        mynameishere 5y ago
        Anytime someone places a short position they are creating demand in the future from themselves. They know this.
        HWR_14 5y ago
        The problem was the callable short. They had nickel coming in N months. They could fulfill it then. They just couldn't take a short position that would be fulfilled then - instead it had to be fulfilled randomly before then.
    - chii 5y ago
      > the shareholders of the bailed out companies ... should personally lose assets if shareholders lose assets, then it's not a bailout. If they get bailed out, then they aren't losing assets. You're talking about the same coin, viewed from different angles. What you wish to accomplish - the shareholders taking a haircut, but for third-parties such as customers or general public to not take one, is impossible.
  - athrowaway3z 5y ago
    You're type of reply is common with people who assume the free market is real and that the rules prohibit interference. Neither has ever been true. Its just a theoretical ideal some people in government argue in favor off. Food subsidies are bailouts under the guise of "social good", in some places they prevent people from starving.
    - jdhn 5y ago
      Your type of reply is common with people who want to avoid the very real question of why the rules are bent when trades go wrong for certain people. Please tell me why you think somebody who shorted nickel so heavily to the point that they almost went broke deserves a bailout.
- joebob42 5y ago
  Is price gouging in this context illegal (genuine question, I know very little in this area, but I would not have thought so). It seems to me like they are effectively just selling at the price the market will bear, which is artificially inflated at present.
- OrangeMonkey 5y ago
  In what way can one force someone to sell at a price you want them to. Is it price gouging if I refuse to sell to you a commodity that you really want if I think I can get more out of it? Is there such a thing as price gouging for metals and is that illegal?
  - throwaway6532 5y ago
    The short sellers got margin called, so they are forced to buy Nickel to cover their short positions.
    - mrleinad 5y ago
      Well, it's part of the game, isn't it? Or if I buy and expect it to go higher, they'll rollback and reimburse me if it falls?
      - lbarrow 5y ago
        The exchange being able to roll back trades in extraordinary circumstances is also part of the game. The exchange obviously has a strong incentive not to abuse this power or the traders will find another exchange.
        djbebs 5y ago
        It really isn't, and the fact that this is the first time it has happened shows that its not.
    - daniel-cussen 5y ago
      If your team loses the basketball game, the rest of your high school hates you. If you lose your job, you lose your health insurance. If you bet on the wrong part of the roulette wheel, you lose your chips. If you miss your rent, you get evicted. In all these endeavors, if you screw up you suck up the consequences, end of story. I feel literally no pity for traders who got margin called, they're forced to buy nickel to cover their short positions but they're just not worthy victims, they're debtors. And these are expensive people, these traders took out those loans to buy proof of their superiority, like cars, houses, jewelry for wives and affairs, investment-type goods like watches...maybe one of them was smart enough to buy Magic cards, but if they get short-squeezed, I doubt it. To my knowledge these traders are consenting adults, 18 and up surely, they gambled and won and took their money, this time they gambled and lost. They have to pay, with nothing but silence from them.
- renw0rp 5y ago
  So why do we even allow entities which are not interested in actually delivering/receiving physical goods to trade futures? Genuine question
  - robbiep 5y ago
    Market makers have an important function in providing liquidity even in the absence of underlying asset. However this can create unusual and aberrant situations that certainly warrant raising these sort of questions in order to determine appropriate regulations and rules
    - krageon 5y ago
      This is an expensive way to say "they give you money maybe, even for nothing". That last part is the problem - if that is their core role, they should not exist. Even if they make some folks a lot (more) money.
      - erincandescent 5y ago
        Market Makers are basically the financial system's buffers: they exist to make sure that you can always buy or sell a given security/commodity. They are the people who make buying or selling something _immediately_ possible, rather than having to wait for someone who needs what you're selling (or is selling what you're buying) to come along. This makes trades move quickly, which speeds up price discovery. This is good for market health. Market makers make their money on the difference between the buy-sell spread. Of course, this is a bet: if the market moves against them, they can lose money on this. Often a market has one or more officially designated market makers who are paid to _always_ have a certain number of both buy and sell offers on the market to ensure that there is always liquidity. The payments help cover their risk (These payments are often also materialized in the form of a "takers fee", i.e. a surcharge you pay whenever you place an order into the market which can be immediately filled) TL;DR: They're a warehouse which will always buy and sell some product, except when talking futures we're talking wagons full of nickel 1 month from now and so the warehouse doesn't physically exist
- rollypoll 5y ago
  I dont think you understand how markets or exchanges work
lbarrow 5y ago
I think it's basically just replacing having a circuit-breaker -- if they had a circuit breaker like a lot of other exchanges, the crazy price jump never would have gotten going.
- Ekaros 5y ago
  I don't think circuit breakers should exist. And markets should operate 24/7. There is absolutely no good reason why they wouldn't in digital age. Players should not make bets where they can lose too much money.
  - kasey_junk 5y ago
    Any short position can lose infinite money, so this argument is equivalent to saying short positions should not exist. Saying short positions should not exist is equivalent to saying commodities producers should not be able to hedge production risk. That has wild implications for commodity prices and availability around the world. If that’s your position you should probably state it more directly.
    - jamesrom 5y ago
      You can hedge short positions. Ekaros is saying that traders shouldn't rely on things like circuit breakers or rollbacks to save them when they make a bet with too much on the line.
      - kasey_junk 5y ago
        In this case the hedge was going the other way. They hedged their real long position with short futures. The market broke and they were in a position where they were losing money as the price of their real asset was sky rocketing. This is because of the natural limits of hedging short positions. Circuit breakers aren’t designed to protect traders from betting too much, they are designed to prevent the market itself from breaking in unforeseen ways.
    - Ekaros 5y ago

chii 5y ago

i'm also surprised this hasn't really be covered in much mainstream media at all, unlike the robinhood fiasco. A good video summary of the events (if you don't want to read a lengthy article : https://www.youtube.com/watch?v=tHXF5LyLI4M https://www.youtube.com/watch?v=tHXF5LyLI4M )

owyn 5y ago
This is unrelated to the parent topic directly, but I just read that article in 6 minutes. I saw this comment before I actually read the article, so I was reading at a normal speed rather than just skimming, to retain enough that I feel like I could explain it to someone else if I had to. That video is 20 minutes long! I know people seem to prefer to consume information from a video vs just reading about it but it kind of struck me that the article was described as "lengthy" and the video was described as a "summary". The robin hood fiasco presumably made more of a main stream impact because it was a "fun" human interest story rather than just a dry technical thing that was a problem, then got fixed, and most people never cared about and definitely will never remember a year from now. Basement dwelling internet nerds win big over wall street! vs Over leveraged Chinese mining company gets a loan!
- chii 5y ago
  The article links to another article (https://www.symmetrybroken.com/the-problem-of-synchronization/ https://www.symmetrybroken.com/the-problem-of-synchronizatio...) which you will also want to read to get the full scope (as it introduces more ideas outside of the nickel issues). The video is specifically about the nickel issue. As for it being 20 mins, i argue that it's only longer because speaking is so much slower. The informational content is less in the video. And i also recommend watching videos at 2x speed!
duped 5y ago
It was on Marketplace (APM/NPR) and CNBC yesterday. That's as mainstream as financial news gets.

ada1981 5y ago

Is there any reason to not just have limits on how much a market can move every day by default?

kasey_junk 5y ago
Most exchanges have circuit breakers. LME is old fashioned in lots of ways and being late to circuit breakers is one way. They’ll have them going forward.
deleted 5y ago
[deleted]
deleted 5y ago
[deleted]
dragontamer 5y ago
Sure, and the past week is proof of the folly of daily limits. LME has added limits. So every day, the nickel market opens, drops 8%, and then closes immediately. No one gets to trade, because everyone knows the price of Nickel hasn't reached its "logical" value yet. So these price limits are a de-facto long-term close of the market until the dollar value matches what people want. So in effect, you've closed the market for days (weeks?) since no trading activity takes place to "correct" the price shock. ---------- I mean, its a terrible situation for the nickel market, but I don't think hard price limits like this are a good idea either. After closing the market for a week (presumably long enough to fix whatever political-glitch was going on), it would have been better to just let the price float to whatever it was, instead of this "lurch 8%, close the market" kind of situation.

SilasX 5y ago

This piece feels ... confused. It starts off with casually assuming that pricing mechanisms "just don't work" for a commodity, which sets a bad tone, but is forgivable if it can deliver. But then I got to this part[1]: >What caused the price spike? The largest nickel producer in the world, a Chinese company called Tsingshan, was short nickel because it had made a huge capital investment and was set to produce 40% more nickel in 2022 than it had in 2021. ... But what if prices go up? Isn't a short dangerous? Not really if you're short nickel and you're a nickel producer. ... Your shorts are "covered" rather than "naked," so your losses are limited. Okay, so far so good: Tsingshan took a short position, which was safe, because it's covered, by virtue of them being a producer of the underlying (nickel). >They're limited, that is, so long as you can deliver nickel against the contracts. But what happens if ... closing your short is going to require you to deliver $10s of billions of nickel, and you're going to have to come up with $1s of billions immediately because of margin calls. You don't have that kind of cash on hand, and you can't deliver a huge chunk of your production up immediately against those short contracts. So ... the shorts weren't actually covered, and you can expect to suffer huge losses if the price goes up. I still don't see the case for voiding the transactions, since the price movement was responding to real macroeconomic phenomena, and the short-seller couldn't actually cover. [1] I've cut out large pieces of the quotes to get the point quickly, while doing my best to preserve the meaning

lbarrow 5y ago
I agree with you on the limitations of the article, and I can see the rise in nickel prices due to the war as "real macroeconomic phenomena", but the short squeezes on nickel produces clearly created a positive feedback loop that pushed the price way higher than the fundamentals justified. Voiding the transactions here serves the same purpose as a circuit breaker on a stock exchange: to prevent temporary pricing feedback loops from causing chaos. If the LME had a circuit breaker (and I'm sure they'll be getting one soon), this wouldn't have even come up.
kasey_junk 5y ago
I largely think it was a mistake to break the trades. That said you can make a logical argument for it if you presume that the LME thinks their job is to act as a price discovery mechanism for “real” nickel instead of acting as a bastion of the LME nickel futures contract. Nickel in the real world does not actually meet the contract specs very often (this is true of most commodities). The bigger issue than the liquidity position of Tsingshan is that they produce nickel that doesn’t meet the LME contract spec. They aren’t perfectly hedged due to this, but they continue to be a major driver of nickel prices in the real world. So if the market was orderly their nickel production should trivially offset any short position they have (and it did with a day or two of looking for financing). From the LME’s perspective, letting Tsingshan, a producer with no evidence of trouble producing nickel fail because of a quirk in the matching engine of LME, when the macro factors should be making them tons of money, is dramatically worse for the natural nickel market than breaking the trades of the speculative participants. In any commodities market the speculative participants dominate the order volume, but the real producers and consumers are the backbone of the price discovery mechanism. If Tsingshan pulled all their future volume out of the LME due to this, it would both destroy the market and hinder future price discovery for nickel. It’s understandable that the LME would take extraordinary action to prevent that. The real question is why they didn’t have circuit breakers in the first place, and thats mostly a culture issue.

lokar 5y ago

As always, the most informative and best written source for a financial story is Matt Levine: https://www.bloomberg.com/opinion/authors/ARbTQlRLRjE/matthew-s-levine https://www.bloomberg.com/opinion/authors/ARbTQlRLRjE/matthe... Read the past week. Subscribe for free via email if you have even a passing interest in financial markets.

Tenoke 5y ago
Matt Levine is generally great, the nickel coverage was great but if you read those posts you'll also see the sections where he keeps writing about how Russia will default on its debts. Then when the opposite happened he didn't even comment on the conclusion of that previously important topic let alone admit there must've been faults with his analysis. Big portions of his readers might not even learn he was wrong and this kind of blatant sweeping of wrong conclusions under the rug makes authors look much more accurate than they are.
- rollypoll 5y ago
  He may still be right...
- axg11 5y ago
  Did Levine set a timeline for Russia defaulting on its debts?
  - Tenoke 5y ago
    Yes, last week for example here[0]. >I guess Russia is going to default on its debt >Yeah, I don’t know, I mean. If Russia doesn’t pay interest tomorrow, or pays it in rubles, will that “shut the country out of most funding markets”? >So the likely outcome is that Russia will not pay interest on those bonds, or will pay it in rubles. And then those bonds will be in default. And Russia will say “we’re not really in default; our default was caused by the mechanics of the international financial system, not by our unwillingness or inability to pay.” and so on. Except Russia paid their debts the next day and didn't default. Apparently he has actually later mentioned that they paid but mostly just as something that's confusing him why so part of my criticism was unwarranted. 0. https://www.bloomberg.com/opinion/articles/2022-03-15/amc-bought-a-gold-mine https://www.bloomberg.com/opinion/articles/2022-03-15/amc-bo...