How do you manage risk of an exchange cancelling trades?

M

Market_Observer

LME cancelled nickel trades this week. Elite traders who should have made money were denied their rightful money. Then there are some who thought they made money, placed other trades like relative value bets, now their relative value bets are screwed up ...

How would you manage the risk of an exchange cancelling trades?

The simplest answer would be to avoid this exchange. If there isn't a viable alternative at the moment, how else can be done?

https://www.straitstimes.com/busine...to-intervene-as-nickel-trading-halt-continues

By voiding the transactions, the LME effectively bailed out bearish position-holders at the expense of their bullish counterparts on the other side of the trade.

What's more, it caused havoc for traders who had been active in the small hours of Tuesday morning. Some sold long positions at a profit, only to have the sale cancelled; some placed relative value bets on nickel versus other metals, only to have the nickel part of the trade cancelled; and some banks used the exchange to hedge positions with their clients, only to have the hedges torn up.
 
Yup, its totally messed up. I read in another article that there are already protocols in place for how to handle a blowup of brokerages, etc. It would have been ugly, but the chips should have been allowed to fall.

This is yet another example for why we need decentralization and blockchain technology for this space since those transactions are final.

As you say, the simplest answer is to avoid the exchange. The only voting power we have is to take our business elsewhere.

As this story develops, I think I read that JPM is on the other side of this trade, and you can damn well bet that they want to be paid. I think they were on the one hand wanting to extend credit to make sure that Asian guy doesn't blow up, but I figure its just to keep him solvent so that they can collect on their bullish bets.
 
That would terrify me. The only time I worried about cancelled trades was during the flash crash in 2011(?). Once I realized it was market wide, I bought all I could, but didnt sell anything on rebounds out of fear the purchases would be cancelled and I'd get stuck short. Good thing because half were cancelled.
 
Aisone said:
That would terrify me. The only time I worried about cancelled trades was during the flash crash in 2011(?). Once I realized it was market wide, I bought all I could, but didnt sell anything on rebounds out of fear the purchases would be cancelled and I'd get stuck short. Good thing because half were cancelled.
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Wow, I wonder if any folks at LME has their Nickel trades cancelled half way and stuck with the lost one as well. At least I believe the market in America is more “fair” than UK.
 
From the article:

"I think the exchange was absolutely right to halt trading," said Mr Mark Hansen, CEO of physical commodities trader Concord Resources. "Everyone has a stake in an orderly, functioning market, and we've already seen as a result of this move in nickel that consumers are closing steel plants or liquidating inventories."

What about a price spike isn't orderly? The reason it goes up is because someone is willing to buy and another side is willing to sell. When you have no bids or offers, that gets crazy. But for every transaction, a buyer is matched with a seller. The market therefore functioned orderly and properly, but clearly the people in power didn't like the direction of the move.
 
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