When a major risk event focuses attention on infrastructure gaps, the question is rarely whether firms will act. It is whether that urgency survives once the market quiets.
This is the fifth article in our Why We Built Loqsea series. Kevin Nutt, Head of Market Development at Loqsea Technology, has spent more than thirty years in the LME and metals market, across senior risk roles at major banks and brokers and as Head of Sales at the LME itself. This is what that view of the market reveals about LME CTRM infrastructure.
Firms know where their CTRM infrastructure gaps are. They identify them most clearly in the aftermath of a major market event, and then the memory fades. Kevin Nutt has watched that pattern repeat across three decades in the LME and metals market. This is his account of what those gaps actually look like, and what it took to find a platform that addressed them properly.
Kevin Nutt joined Loqsea Technology as Head of Market Development after more than thirty years across senior risk and sales roles in the LME and metals market. Loqsea holds LME ISV status, recognising the platform’s technical rigour for firms trading LME-listed instruments. The pattern Kevin has watched repeat throughout his career is consistent across every institution and every market cycle.
“Each time a major risk event hits the market, the tools used to manage risk are in focus. However, as the memory of the event wanes, some firms quickly become reluctant to upgrade their technology and processes, and have continued to make do with sub-standard, often disparate systems, or even simple internally built spreadsheets. The reluctance to upgrade often relates to a combination of cost and effort, and so the gaps that may have been identified in the immediate aftermath of a risk event are consequently never dealt with. I have often seen different teams working from different risk numbers for the same position or portfolio, leading to confusion, bad decisions and delays. This can be fatal in fast markets.”
What Kevin found in Loqsea was a platform that addressed those barriers directly.
“Loqsea provides a cost effective and comprehensive risk system, providing a single set of data which can be used by all users. With low touch implementation and agile development, many of the perceived barriers to change are removed.”
The most common sign of a fragmented LME CTRM infrastructure is not a system failure. It is the quiet, normalised gap between what one part of the business sees and what another sees.
“It is not uncommon for there to be differences, or let us call them what they actually are, errors, between the position, margin and P&L seen within a trading desk’s spreadsheet and the risk department’s system. Additionally, businesses evolve and develop, but many risk systems remain static. The development is too costly, or the development team is insufficiently agile to cope with a new risk or business line in a timely manner. This often leads to gaps being plugged with a proliferation of systems, manual processes and spreadsheets.”
Loqsea’s approach addresses this directly.
“Loqsea’s modus operandi is to fully understand the markets in which it operates, to provide agile solutions taking account of market idiosyncrasies, to work with its clients to allow for cost-effective development, and to build intuitive tools and interfaces, allowing the data to be consistent, readily accessible and relevant to all user types.”
Kevin was at the LME when the 2022 nickel crisis unfolded. In a single session on 8 March 2022, LME Clear called more than $7.4 billion in additional margin. For many firms, the event did not create new problems. It made existing ones impossible to ignore.
“This was a sobering time for all market participants. The overall quantum of the risk faced by the market was clearly the key factor, but for many it did also unearth gaps in processes, systems and procedures. It certainly highlighted the need for real-time, comprehensive risk tools with consistent data being available to all key stakeholders. Any lack of certainty, or any degree of difference in position, margin or valuations, is accentuated in volatile markets and in many cases will lead to delayed decisions, or decisions based on inaccurate data.”
The firms that held an accurate, live picture of their position were in a different place from those that did not.
“When the theoretical black swan becomes reality, business owners, traders and risk managers, to a man, would have given their right arm to have an enhanced level of certainty of where they stood.”
The LME has structural characteristics that a CTRM platform built for the mass market will not handle correctly without shortcuts and workarounds.
“Many system providers build their platforms for the masses, offering generic futures and options systems. Commodities, and certainly LME, can often be an afterthought. This generally leads to shortcuts and workarounds. While parts of any risk process can be based on estimations, a one-size-fits-all approach will not work well for LME trades, and it is imperative that the idiosyncrasies are understood in order for the risk data to be as accurate as possible.”
“As an example of this, the LME curve interpolation tool within Loqsea creates a non-linear, time weighted curve to better reflect the market norms.”
The standard workaround is to overlay additional systems and manual processes to bridge the gap between a generic CTRM platform and what the LME market actually requires.
“Many try to bridge the gap between generic futures and LME by overlaying additional systems, spreadsheets and manual processes. This often creates more issues than it solves, as the results need to be sense-checked each day. This review process takes time and effort, and creates additional operational risk, including human error, which may compound the existing inherent inaccuracies.”
Kevin’s assessment starts with how the platform handles the LME’s specific structure. Central to that is the LME Trading Card, built for how LME contracts actually settle across prompt dates. Discover more about our coverage in the metals space.
“A platform built with a genuine understanding of the underlying markets, not a generic futures system. For LME, this includes a dealer card with the full date structure, as well as a comprehensive picture of a trader’s or client’s positions. The position summaries do not just include exchange-traded outrights and spreads, but also options and OTC, including priced and unpriced averaging.”
Beyond the LME-specific structure, what stands out is the breadth of what sits within a single interface.
“It is not just the product set that the platform covers that is impressive, but the array of additional features, from option stress testing and P&L analysis to what-if scenarios and AI portfolio interpretation tools. I have not seen so many features combined into a single platform in my thirty-plus years in this market, especially one that is so intuitive to use.”
Kevin’s network in the LME and metals market runs deep. The conversations that come with it are direct.
“I am fortunate to have many ex-colleagues and friends in this industry, allowing for extremely candid conversations. They know exactly where the friction is and can identify where their processes and systems are sub-optimal. The question is: so why don’t they deal with these issues?”
The hesitation, Kevin finds, is almost never about whether the problem is real.
“Their hesitation is rarely linked to a belief that these shortcomings are not a real risk, but to the need to balance this against the cost, disruption, and workload created by implementing a new system, and whether the new platform will actually deliver what it promises. Post demonstration, testing and pricing, they generally find the answer, and we move forward from there.”
“As time moves on, human nature dictates that the memory of difficult market events fades, and firms convince themselves that the current setup is good enough. Optimising risk management is not a luxury. It is at the heart of a successful business, perhaps more so than ever. The disruption of changing systems is real, and I would not pretend otherwise, but it is finite. The risk of continuing with systems that do not pass muster is unknown, but at the extreme can be very costly. What is certain is that there will be more black-swan events, or simply heightened levels of market volatility, and I would just encourage teams that have identified shortcomings to deal with them before these hit.”
Ready to see what an LME CTRM platform built for the metals market looks like in practice?
Schedule a demo and we will walk you through it in the context of how your desk actually runs.
