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At a time of turmoil, the London Metal Exchange encountered a "margin algorithm own" this week.
Mar 5, 2022 17:14CST

Software glitches on the world's leading exchanges have also worsened the already chaotic situation for commodity brokers who have just experienced their first market in decades this week.

The clearing house of the London Metal Exchange generated a "very large number" and wrong margin call on Wednesday, according to media reports on Friday. Some brokers had erroneous margin orders totaling hundreds of millions of dollars on Wednesday and Thursday, according to people familiar with the matter.

The London Metal Exchange responded to the media on Friday that the problem had been properly resolved. The exchange explained that these additional guarantee orders were not issued to users because of the margin audit process built into the company's system. All brokerage members are notified immediately and the manual backup process of the exchange is in place in time.

To explain briefly, the clearing firm will require brokers to adjust the margin on a daily basis to cover the potential losses of their clients, and the margin ratio will also be adjusted in the event of sharp market fluctuations.

Although the LME did not force anyone to make additional payments because of the mistake, the timing of the mistake was too bad.

Affected by the situation in eastern Europe, basic industrial metals such as aluminum, nickel and copper have all experienced a sharp rise in the week. The LME index of six metals is up more than 7 per cent this week and is still on its way to record highs. It also means that a large number of clients themselves have a need for margin calls, with many traders shorting on exchanges as a hedge against physical goods on hand.

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According to several traders and traders, many brokers have been reluctant to accept new short orders for aluminum and nickel futures due to concerns about the geographical situation, resulting in a decline in market liquidity, which is part of the reason why Lenny soared nearly 10% on Friday.

The exchange said the company had to suspend the use of automated systems on Wednesday and instead calculate deposits manually. With follow-up investigations, it is easy to discover the reasons for the algorithmic errors: this year's UK holidays are different from those in previous years.

Since this year happens to be the 70th anniversary of the Queen's reign, the bank spring holiday in May has also been moved to Thursday, June 2, to form a four-day short holiday with the Platinum Jubilee Bank holiday on Friday. But engineers at the London Metal Exchange have failed to deal with such changes in advance.

Since the most actively traded contracts on the London Metal Exchange happen to be products delivered within three months, the holiday problems in early June also coincided with this week.

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