Market Holidays: Same Commodity, Different Exchanges
Monday August 26th, 2024 is a bank holiday in the UK therefore it is also an LME holiday. However, there is no such holiday in the US, therefore the copper contract on the CME will be trading business as normal. There are multiple occurrences of this throughout the year where federal holidays do not coincide with other countries'. This creates a potential for exposures on markets that trade across different exchanges for the same commodity.
If you are running an outright speculative position, for example, long copper futures on the LME, the LME price will not change on a day the LME is closed. However, the global price for copper will be impacted by the daily trading on other markets that remain open, such as the CME and SHFE. If traders in the US were to aggressively sell the CME copper contract on a Monday that the LME was closed, your long LME position would still be exposed to this downside move, but until the LME reopened at 1AM London time the following day, you may not be able to adjust your position, or any orders you had left.
The danger here is that the market may move well past any protective stops you had in place. Let's say that you were long copper at $9,500/mt on the LME and on the Friday of that week LME 3M copper closed at $9,550. However, over the weekend there was a news event that changed the short-term supply/demand dynamics leading to an expected vast oversupply of copper. When the CME opened back up for trading, the price quickly tumbled from $4.332 (remember the CME trades in $/lb) all the way to $4.173, an equivalent on the LME of $9,200. Your long position is now $300/mt out of the money and unless you know how to handle these situations, you are still at risk of further downside exposure. Even if you had stops in place on the LME, when that market opens back up at 1am London on the Tuesday it would be very likely to gap all the way down to match where the CME was currently trading (taking into account any arbitrage that existed at the time). Let's say your protective stop was at $9,300/mt, you would be automatically filled where the market opened up, including facing any slippage before your order was able to be filled. Based on the LME re-opening at $9,200, your fill could easily be more than $100/mt below your stop level, adding a significant amount of risk to the trade.
This risk is not limited to speculative traders. Let's say you are a physical commodity trader and one of your sales customers has left a buy-stop order working for a copper sale you are currently delivering. Customers will sometimes want to leave protective stops in place to limit the physical price they pay for a commodity. Let's say the LME had closed on at the same $9,550 on the Friday but this time CME copper traded aggressively upward on the Monday. When the LME re-opened on the Tuesday it was at a figure of $9,800/mt. If your customer had a buy-stop order in place at $9,600, it would instead be filled at $9,800 when the LME reopened on Tuesday morning. If you do not know how to handle these situations, and have also not explained how the markets work to your customer, you would be faced with a very awkward call to your counterparty on Tuesday morning.
This risk is not limited to exchange holidays. Because the CME trades 23 hours a day, 5 days a week, and the LME only trades from 1AM London until 7PM London 5 days a week, there are often times when news events occur while the LME is closed but the CME is open. Each FOMC interest rate decision for example occurs at 2PM Eastern time, just after the LME is closed. Markets will often have large reactions to these type of announcements that can have significant macro implications. If you are going to be running stops and orders for customers, it is wise to familiarize yourself with the options that are available to you in order to limit unnecessary exposures. One of the worst things for a trader is to be running much larger risk than they thought they were and to suffer losses far greater than their compliance and risk teams would allow.
There are ways you can mitigate the risk of markets gapping past protective stops. The best way to do this is to instruct your broker to work stop orders across multiple markets in the case of an exchange holiday. For example, if you had an open LME position and knew the LME had an upcoming closure when the CME was staying open, you could ask your broker to work any stops basis CME prices until the LME reopened. While you might face some arbitrage risk, and this would likely cost you more in broker fees than simply working a stop on the LME, you would be largely protected against sizeable moves that caused gapping on the LME. The broker would either fill you with a CME position, and then work with you to convert it to an LME position with an arbitrage trade the next day. Or they may also simply fill you with an LME position and handle the CME side entirely themselves depending on your account setup/arrangement with them.
You should also be monitoring the markets that remain open, even if your primary market is closed, particularly around any news based events you know are upcoming. Even if you don't have protective stops in place, you may be able to get a quote to close out a position, or at least adjust to changing prices in real-time, rather than simply waiting until your market opens back up the following day.
