Manipulation of Metals Futures: Lessons from Sumitomo

The Sumitomo Corporation manipulated the London Metal Exchange (LME) copper price, which forms the pricing basis for the world copper market, from at least 1991 until earlier this year. This manipulation has concentrated attention on the functioning and governance of London futures markets, and in particular of the LME. This paper argues that futures market manipulation is not illegal under UK financial services regulation, but that in any case, deterrence is better than prosecution. Manipulation will be best deterred by greater transparency, in particular through mandatory reporting of client positions to exchanges, but also through the publication of suitably aggregated positions data. While there is no evidence that the LME has been insufficiently active in attempting to eliminate manipulations, price discovery on futures markets generates an externality that justifies the regulator seeking even higher standards in the future.