(Yicai Global) March 10 -- The London Metal Exchange should introduce a trading cap to prevent the wild swings in prices that have recently led to the commodities bourse suspending all nickel trading, the Shanghai Securities Journal reported today, citing a former director at the Chicago Mercantile Exchange.

Unlike the Shanghai Futures Exchange, the London Metal Exchange’s trading rules are more geared towards spot trading, and there is no Limit Move, said Jim Huang, ex-director of strategic planning at the Chicago bourse.

The Limit Move caps the maximum daily fluctuation in a commodity futures contract and is an important risk management tool in futures and securities trading, Huang said. When there is a sudden surge or fall in prices, it slows down the impact, giving investors time to process information and implement risk control strategies.

Huang is referring to the recent meteoric rise in the price of nickel futures, surging almost three-and-a-half times to USD101,365 a ton in London on March 8 from the day before, causing the exchange to halt all trading in the metal and postpone the delivery of all spot nickel contracts due yesterday.

"Producers hedge with futures to protect themselves from adverse price swings. Trading contracts without an exchange-imposed cap means that risks cannot be effectively defused through hedging, especially in cases of extreme volatility," Huang said.

More Chinese enterprises need to train their core management team in risk management, Huang said. Some bosses make overweight investments based on personal experience. This can lead to very heavy losses if they make mistakes. Even with a strict trading risk control system in place, this can be over-ridden by the company’s bosses, he added.

Editor: Kim Taylor