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Extreme Volatility in Commodities – Distress in the Nickel Market

Extreme Volatility in Commodities – Distress in the Nickel Market

Recent events in the commodities market have raised a spotlight on price levels and volatility. On the 8th March 2022, the price of Nickel soared by 250% to more than $100,000 a ton and the Bloomberg Commodity Spot index leaped 13% in a week — the largest one-week price increase in 60 years.  

What happened in the nickel market

Since the start of the Russian/Ukraine crisis, nickel prices were on the rise. Russia is the third largest producer of nickel in the world. By early March, volatility was starting to spike and on the 8th of March, the three-month nickel forward prices skyrocketed.  Subsequently, the London Metal Exchange (LME) suspended trading in the nickel market for six trading days.

One of the world’s largest nickel producers reportedly held a large short futures position of 30,000 tons of nickel on the LME. At that time, and unbeknownst to the LME, the same client also had bilateral OTC short positions of approximately 120,000 tons with various banks.  As prices increased rapidly, the large client was apparently unable to post the necessary margin to cover its exposure both at LME Clear (LMEC) and with the banks. 

The CEO of the LME, Matthew Chamberlain, explains the situation as a technical issue with two elements at play. “The first is a commodities market […] which clearly is tight given a scarcity of commodities and given the horrific events in Ukraine and the Russian commodities and commodities chains. But with nickel, there was another element, which is that a larger client of the market had built up a short position in the over the counter [OTC] market and it became obvious as that [nickel] price hit $100,000 that there was a very real problem, which was not related to market fundamentals, it was related to this technical over the counter problem”.

The event in the nickel market prompted the European Federation of Energy Traders (EFET) to write to governments, regulators and central banks warning of “intolerable cash-liquidity pressure” across the sector and requesting a “time-limited emergency liquidity support” to ensure that the wholesale markets continue to function. 

Given the extreme price moves and thin trading volume during early hours trading on the 8th March, the LME made an unprecedented decision to cancel all trades executed on or after 00:00 UK time, potentially wiping out billions of dollars worth of trades. 

Cancellations reset prices back to the last point at which the LME was confident that the market was operating in an orderly fashion and when prices reflected the underlying physical market – i.e. the close of the previous trading session at $48,078. 

ViP – Detecting a market squeeze in the nickel market

Reflecting on the distress in the nickel market, much focus and attention has been paid to the large short position amassed by a particular market participant, and appropriately so. Putting on a surveillance hat, we should also focus on whether an account or multiple accounts, acting in collusion, could have triggered a momentum ignition that brought about the short squeeze, especially with the backdrop of the crisis in Ukraine. 

Momentum ignition is when an account or multiple accounts enter orders to trade, or execute transactions, likely to start or exacerbate a trend and to encourage other participants to accelerate or extend the trend in order to create an opportunity to benefit from a favourable price move.

Recently an LME spokesperson said “We are committed to ensuring that the actions of all participants are fully reviewed, and appropriate actions taken to both restore confidence and support the long-term health and efficiency of the market”.

It will be interesting to see the findings of the LME’s review and in particular, whether the actions of participants that stood to benefit from the short squeeze contributed to the price moves, and how. Validus is capable of detecting order activity that triggers price moves in the market, and when such activity potentially causes momentum ignition, i.e. other market participants joining in on the price move.


About Eventus

Eventus is a leading global provider of multi-asset class trade surveillance and market risk solutions. Its powerful, award-winning Validus platform is easy to deploy, customize and operate across equities, options, futures, foreign exchange (FX), fixed income and digital asset markets. Validus is proven in the most complex, high-volume and real-time environments of tier-1 banks, broker-dealers, futures commission merchants (FCMs), proprietary trading groups, market centers, buy-side institutions, energy and commodity trading firms, and regulators. The company’s rapidly growing client base relies on Validus and Eventus’ responsive support and product development teams to overcome its most pressing regulatory challenges. For more, visit  www.eventus.com.