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One trader helped exacerbate the massive nickel short squeeze on the London Metal Exchange last March by building up a $600 million position as the market spiraled out of control.
That’s one of the most striking pieces of new information from a long-awaited independent review into the crisis published by the LME on Tuesday. While the report didn’t name any market participants or spell out whether it found any manipulative behavior, it provided tantalizing new details on the trading and market positions in the days and hours before the LME suspended the market and canceled billions of dollars of deals.
Related: The 18 minutes of trading chaos that broke the nickel market
The report, prepared by consulting firm Oliver Wyman, said that much of the trading that caused nickel prices to spike by an unprecedented 270% in three trading sessions on March 4, 7 and 8 was due to short covering. That came from both physical market players like nickel producers and traders, who had short positions on the exchanges as hedges against their physical holdings, and their banks and brokers.
But it also detailed how, from 6 a.m. London time on March 7, “one financial client with no material existing nickel position started to accumulate a long position on the exchange.” That was the day nickel prices spiraled out of control, rising 66% over the course of the day and setting the stage for a full-fledged melt-up the following morning.
The mystery buyer represented 13% of net buying in the market on March 7, according to the Oliver Wyman report, accumulating a position of more than 12,000 tons of nickel by the end of the day. At the closing price that day, that would have been worth over $576 million.
Other new details revealed in the report include:
Even more of the banks and brokers that are the LME’s clearing members struggled to pay their margin calls than had previously been disclosed. The LME said in a legal filing in November, citing the then-head of its clearinghouse, that three members had failed to pay margin calls on time on March 7. However, the Oliver Wyman report showed that four members had not met a 9 a.m. deadline, while another needed to post “alternative collateral.” (The LME said the discrepancy was because two members had paid only minutes after the deadline, and so had not been flagged to the clearinghouse’s top management.) In total, LME members were late paying more than $1 billion in margin on March 3-7.
The banks and brokers were struggling to pay margin to the LME because their clients weren’t paying margin to them. On March 8 — when the LME closed the market — clients missed margin calls of $5.9 billion against OTC positions. More than $2 billion of that was attributed to two clients.
One user of the market had a long position of 162,000 tons, while four users had short positions of between 78,000 and 144,000 in the months leading up to the short squeeze.
(By Jack Farchy and Mark Burton)
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