The London Metal Exchange (LME) won a UK court challenge by Elliott Investment Management over its controversial decision to halt a runaway short squeeze in the nickel market last year, removing one of the biggest threats facing the LME as it seeks to move past the crisis.

Challenges by both Elliott and trading firm Jane Street were dismissed, according to a ruling on Wednesday. The judges said the exchange’s executives should be granted wide discretion to make the urgent decisions that they did.

The LME was catapulted into the global spotlight last March and drew widespread criticism after it suspended the nickel market and retroactively canceled US$12 billion of trades. Elliott sought to have the cancellation declared unlawful, claiming the decisions cost it more than US$450 million. The hedge fund said it intends to appeal the court loss, while Jane Street said it will evaluate its next steps.

The ruling represents an important milestone in LME’s efforts to rebuild confidence after the nickel crisis, while also confirming the power of the exchange’s executives to make decisions with far-reaching implications for wider markets. The LME holds a crucial position in the global industry as the home of benchmark prices for the world’s key industrial metals.

“We are pleased that the court has ruled in our favour on all grounds,” LME chief executive Matthew Chamberlain said in an emailed statement. “We remain committed to continue enhancing market resiliency and liquidity for the benefit of our business and the global metals community.”

Nickel prices initially started rising last year as the invasion of Ukraine sparked fears about the impact on supplies from Russia, but the spike accelerated as holders of short positions rushed to close out the trades. Tsingshan Holding Group Co faced billions of dollars in trading losses as prices jumped more than 250% in little over 24 hours, and the LME’s decision to cancel trades on March 8 effectively served as a bailout for the world’s top nickel producer and other holders of short positions.

“The LME is to be allowed a margin of discretion in respect of its approach to the matters to be considered when assessing orderliness,” Judge Jonathan Swift said in the ruling.

Still, the court case shone a harsh light on the exchange’s decision-making during the crisis, with filings and witness statements revealing how the LME was in the dark about what was really driving nickel prices during the unprecedented surge in early March, and that its top executives were asleep as the market spiralled out of control.

Death spiral

Elliott argued the exchange exceeded its legal powers in cancelling the trades or had used its powers irrationally, while the LME defended its actions as necessary to prevent a “death spiral” that could have led to nearly US$20 billion in margin calls and the collapse of several brokers.

Jane Street also filed a smaller suit, in which it claimed US$15 million in damages. A group of firms including AQR Capital Management LLC have sued the LME separately, and their case was placed on hold pending a decision in the Elliott case.

The LME has spent the past year seeking to move past the nickel squeeze, and has rolled out a series of reforms and rule changes to restore confidence and prevent a repeat of the crisis. Liquidity has been improving in the battered nickel contract, although it has yet to return to pre-crisis levels, and trading volumes have also picked up in the exchange’s other metals.

“It’s encouraging to see market vibrancy build,” Chamberlain said. “The support and guidance of our market stakeholders have also been invaluable in ensuring our nickel contract remains the key global reference, with volumes continuing to rebuild through the year.”

Elliott said the judgment raised questions about trading certainty “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.”

The LME is still facing a rare misconduct probe by the Financial Conduct Authority, which is the first public action of its kind targeting a UK exchange, and is focused on the LME’s actions, systems and controls in the run-up to the suspension of the nickel market.
 

  - Bloomberg