When Matthew Chamberlain woke up at 5.30am on March 8 2022 and glanced at metals prices on his phone, he immediately knew something was wrong.

As the chief executive of the London Metal Exchange scrolled through his mobile — still bleary after dealing with emails until nearly 11pm the night before — he became “alarmed” at the speed at which the price of nickel was rising.

By 5.53am the nickel price had jumped 30 per cent — and was still going up. “I had never witnessed such extreme price movements,” Chamberlain says in court documents. “There was no doubt in my mind that the market had become disorderly.” Just after 6am nickel prices had soared past $100,000 per tonne, up from $60,000 when he awoke.

Chamberlain checked his inbox, looked at the news, and did a rough calculation of the intraday margin call his users would be required to pay to keep open their trades at such an elevated price: more than $10bn, he estimated.

The actual number turned out to be nearly double that — enough to push several LME members to the brink of default and pose a “systemic risk” to the market, according to Chamberlain’s testimony.

What Chamberlain knew, and when — and how his thought process evolved during that fateful day — are at the centre of a high-stakes legal battle that will determine the future of the LME and has the power to reshape London’s financial markets.

In the case, hedge fund Elliott Associates and market maker Jane Street Global accuse the LME of making hasty and unlawful decisions during the nickel market crisis of March 8 2022, and seek compensation of nearly half a billion dollars.

Later that day Chamberlain suspended trading in the nickel market, and cancelled all nickel trades that had taken place earlier that morning. Elliott says it was deprived of $728mn of gross proceeds because of the cancellation.

This article is based primarily on court documents submitted ahead of the trial, including skeleton arguments and witness statements.

With the case under way in London this week, the face-off between the hedge funds and the 146-year-old commodity exchange has gripped the City. Its ramifications could ripple far beyond the LME itself.

“Everyone is watching it carefully,” says Jonathan Herbst, head of financial services at law firm Norton Rose Fulbright. “If it were to succeed, there would be implications for all of the market,” including other exchanges, he adds.

At stake is not only the future of the LME, which is also being investigated by regulators over its handling of the nickel crisis, but also the role of London itself as a financial centre.

In legal terms, the case is unusual because it is a judicial review — a type of case typically brought against government departments and public authorities, to challenge whether their decision-making has been lawful.

In bringing this judicial review against an exchange, the case could establish precedents that apply to other exchanges as well, particularly how an exchange’s leaders make decisions in time of crisis.

Inside a crowded and stuffy courtroom at the Royal Courts of Justice in London, the hearing under way this week has revealed fresh details about how the LME’s chief executive handled the crisis, and why he decided to retroactively cancel $12bn of nickel trades on March 8.

The scale of the crisis was already becoming apparent on March 7 when rising nickel prices and record intraday margin calls meant that some LME members were struggling to pay.

The LME took the “extremely unusual” step of deciding to pause intraday margin calls that afternoon, according to witness statements from Adrian Farnham, chief executive of LME Clear, the clearing house.

“In practice, this meant that we did not make approximately $2.5bn of intraday margin calls that would otherwise have been made during March 7 — instead, these amounts were called overnight,” says Farnham’s witness statement.

A key question raised by the claimants is why the LME concluded that the market was “orderly” on the evening of March 7 — despite red flags and surging prices during trading — yet decided it was “disorderly” on March 8 when the volatility continued. That day, surging prices forced the LME to make an unprecedented nine intraday calls for more margin, totalling $7bn.

On the morning of March 8, after waking up to the rocketing nickel price, Chamberlain started getting calls from LME members who said they might not be able to meet their margin calls — which would put them in technical default on their payments to the LME.

The LME had never been in a situation where more than one member defaulted at the same time, a possibility that seemed very real on the morning of March 8. Not only would this have threatened stability across other commodities markets, but it also had the potential to threaten the LME itself, because when a member defaults, the LME has to step in to cover those trades.

Previous legal filings show that the LME’s own clearing house default fund was in severe danger after the sudden market moves.

Chamberlain says he cancelled the trades to prevent the “systemic risk of multiple simultaneous defaulting members”, and that he and his colleagues considered other options — including doing nothing; and adjusting the trades to a lower price — but found these unsuitable. On the previous day, the exchange had also considered imposing a daily price limit on nickel, but decided this was impractical to do at short notice, and tabled it for longer-term consideration.

However, his witness statements also reveal surprising gaps. Chamberlain says he was unaware that the market turmoil was influenced by a large short position held by Tsingshan, the Chinese nickel producer, in over-the-counter (OTC) contracts which are not visible to the LME.

The position was common knowledge in the market and noted in media reports on March 8, but Chamberlain says he only became aware of it later.

Chamberlain also did not realise that his colleagues in Asia had removed overnight the price bands that normally prevent large swings, which may have contributed to the rapid rise in prices.

The role of the LME’s owner — the Hong Kong Exchange, which purchased the LME in 2012 — is also under a spotlight in this trial. Chamberlain says he was in contact with the HKEX chief executive during the crisis, and that colleagues from HKEX joined several calls on March 8 but did not seek to give advice or influence any decisions taken by the LME, according to witness statements.

In the legal case, Elliott says the LME had better options than cancelling the trades — such as doing nothing, or honouring the trades but lowering the margin call — and unfairly favoured certain market participants over others when it cancelled the trades.

“It’s really no exaggeration to say that this decision sent shockwaves through commodity markets,” said Monica Carrs-Frisk, one of the lawyers representing Elliott, in opening statements in court on Tuesday.

Tom Houlbrook, an Elliott commodities portfolio manager, in written testimony submitted to the court calls the retrospective cancellation of nickel trades by the LME “utterly unwarranted”.

“I believe they have exceeded their lawful powers [by cancelling the trades], and have both deprived the claimants of their legitimate profit on their trades, and materially undermined the integrity and stability of the market which the defendants are responsible for managing,” he says.

The LME defence lawyers have yet to speak in court. The exchange said in a statement: “In pressing and extraordinary circumstances, the LME at all times acted in accordance with its rules and regulatory obligations and in the interests of the market as a whole.”

Additional reporting by Rachel Millard, David Sheppard, Jane Croft and Kate Beioley.