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Price discovery is one of the most important functions of the Exchange. The most reliable prices in any market are derived from those where the greatest concentration of trading takes place. While trade can take place at any time on the LME because of its flexibility, the greatest concentration for each contract occurs during the five minute ring sessions, especially the second ring session.
At the end of each five minute ring (in the second ring session) the LME market operations staff, who monitor ring trading from the ring itself, determine the official prices from the last bid and offer for cash, three months and fifteen months before the bell is sounded to end the ring.
These prices become the settlement prices (that is, the cash seller's price) so long as they result from trading in the ring which meets all the LME standards. The ring prices are highly transparent, and are sent around the world almost instantaneously. Market participants are able to judge immediately that the prices properly reflect supply and demand at that time, and have great confidence in the result.
Other prices in the forward curve are determined using trades as well as established formulae - this is important as not every date available might be traded on each business day.
The Exchange also determines "unofficial" prices from the fourth ring in a similar way to the official prices.They are used as a further benchmark and are helpful where there have been significant price movements between the second ring and close of floor trading.
One further set of prices in important to note.These are the closing prices, derived from the final kerb session of the day. These are important for market participants as LCH.Clearnet uses them when it determines margin requirements at the close of business.
Click here to read the procedures for the establishment of LME closing prices. (PDF)
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