Very early in my career, I visited a potential new client with my then boss, the head of brokerage. It became clear very quickly that the client had no interest in my statistics on aluminium consumption or my views on new smelter technology.

He wanted to know what the LME aluminium price was going to do. My boss side-stepped the questions a couple of times until, at the end of the meeting, he announced to the client: “When it’s going to move, I’ll call you.”

The client signed up.

Any relationship between broker and client predicated on this type of promise is flawed.

Very few brokers have enough market intelligence to be able to forecast prices, yet clients often ask the question anyway and give a disproportionate amount of deference to the broker who claims to know the answer.

Many brokers simply make up an answer when asked who’s doing what on the market: “trade buying” or “fund selling”. And how many times is the real answer illuminating? A hedge fund may be buying futures to close an old short position or to open a new long one; it may have 50 lots to do or 5000.

It is hard to glean anything useful from one piece of information. What is of value, however, is a phone call to say that the forward spreads are tightening or that open interest on December calls is rising.

There may not be a great deal of kudos to be earned by the broker in passing on this kind of information but there’s a lot of money to be saved by the client by having early warning of a changing trend.

Choosing a broker is, in many ways, not as hard as it used to be. Since all LME contracts are backed by the Clearing House and there are stringent rules for capital adequacy and margining in place, the issue of financial strength is not as crucial as it once was.

The Clearing House guarantees contracts between members by asking them to post margin and if the markets move against them, to top them up.

The idea is that the funds held by the Clearing House will cover any losses arising from the default of a member and it seems to work.

It is important to realise that the Clearing House guarantees the contracts between member firms, not between the client and the broker, although its existence does reinforce the fabric of the LME which is to everyone’s benefit.

The question of commission is usually settled quite quickly, and compared to other trading environments, LME commissions are low.

Credit lines are of greater significance as no client wants to keep paying margin, especially if the LME position is a hedge and is doing its job by protecting the company’s physical position.

The size of any credit line is important, as is the broker’s willingness to take assets other than cash as comfort if there is a margin call. (A broker with a physical trading arm may be more willing to take title to physical metal for close to its marked to market value. A pure brokerage outfit may give a much lower percentage of the value).

There has long been a debate over whether to ask your LME broker to quote for business, or to use an off-market broker who doesn’t quote but chooses the best price from a number of market-makers.

If there is a higher commission to pay using this indirect route, the rationale is that it will be offset by better prices.

I cannot say if this is true or not and as far as I know, no one has ever conducted a long-term survey to test the hypothesis, but there are other benefits to using an off-market broker.

Many LME clients are uncomfortable using one broker to both advise and to execute business.

If there is just one broker, how can the client be sure the advice is dispassionate and not designed to generate commission (or help the dealer out by taking an unwanted position off his hands).

The simplest solution is to have at least two brokers and divide the functions between them – one to advise and take a small amount of routine business, another to execute the large transactions.

In order of importance, I would rank broker services as follows:
- Flexibility on credit and margining
- Reasonable commissions
- A good understanding of your business
- A sound knowledge of contangos and backwardations
- A big option book, and an averaging book, if you need it. In-house liquidity in these two areas is very helpful
- If you need to swap warrants, a good presence in this marketplace can keep premiums down
- A competent and accessible back office
- A computerised trade management system offering the type of execution you need
- A research department
- Local offices

For the record, the aluminium customer who I have portrayed as simplistic and gullible, was anything but. He traded once, failed to pay a margin call on his substantial position, then promptly went bust.

London-based Lesley Campbell is retained by a number of industrial companies to advise on commodity, foreign exchange and investment risk, and writes regular technical analysis reports for business analysis and consultancy group CRU.