FOWintelligence reported today that sources close to the London Metal Exchange have said that the race to buy the exchange will be run not only on price but also on showing “empathy” to the existing structure of trading.

This injects and interesting dynamic into the bid. When the IntercontinentalExchange bought out the International Petroleum Exchange in 2001, a condition of the deal was the closure of the pit. This was not achieved until 2005, in the meantime IPE was effectively paying ICE to run the exchange without the deal completing and money changing hands.

ICE will have no such luxury should it be successful in its bid to acquire the LME.

The LME is a dominant force in global commodity trading and, despite its open outcry trading model and idiosyncratic contract specifications, (most LME futures contracts offer daily and weekly rather than monthly prompt dates), it has managed to maintain its status as the world’s leading metal exchange.

There have been some challenges, Comex built liquidity in its copper contract launched in 1988 (but was unsuccessful in its aluminium contract), however, LME has retained its crown against all challengers that have crossed its path.

But times are changing and the LME has never faced a challenge on the scale it will face from Asia over the coming decade. Most notably from China where the Shanghai Futures Exchange and Hong Kong Mercantile Exchange (which will launch a copper contract this year) stand out in commodoties.

In 2010, over 600m changed hands on the Shanghai Futures Exchange compared with 119m on the LME. Chinese markets cooled in 2011 with half the volume traded in Shanghai but the figure was still double that on the Chinese exchange than in London, despite the growth to 146m contracts on the LME.

Of course, the contract sizes in Shanghai are smaller, with the copper contact on Shanghai coming in at 5 tonnes compared with 25 tonnes on the LME. However, China’s commodity markets are currently purely domestic; when they eventually open up, volumes will explode.

The question is will the LME be able to fight off the challenge with its current contract specifications and trading model. The general sentiment seems to be that it will have to change to meet the challenge.

All this leaves the buyer of LME in a catch-22 situation. On the one hand preservation of the current trading methods looks like a prerequisite, on the other, changing them may be the only way to realise and maintain the value of the exchange.