Can CME Keep Up Trading Momentum?

In its recent earnings, CME Group witnessed 7% annual growth in clearing and transaction fee revenues, with trading activity rising for interest rate and foreign exchange derivatives during the quarter. Keeping up the trend of the quarter ending September, trading activity rose significantly in October (both sequentially and year-on-year). Average daily trade volumes rose to a record 17.6 million contracts a day in October – 60% higher than the year-ago period. It was also the fourth consecutive quarter of y-o-y growth in trading volume. The last time CME witnessed four consecutive quarters of growth in trade volumes was back in April 2011, with an aggregate 15% rise in trading volumes in that period. Comparatively, CME’s derivative trading volumes have risen by 24% in the four-month period ending October. Given the current trading environment, trading activity could remain healthy through the end of the year, giving the global exchange operator the longest period of sustained growth in the last five years. See our full analysis for CME Group Trading Volumes Rise Across All Asset Classes CME’s combined trading volumes across all derivative classes including interest rates, energy, equities, metals and foreign exchange, rose both sequentially (+15.2%) and annually (+58.5%) in October to 17.6 million contracts traded per day. November volumes thus far have also been higher than the year ago period at 13.1 million contracts. However, it is important to note that the comparable year-ago period was witnessing a slump in trading volumes after high trading activity in Q2 2013 due to speculation about the Fed’s future monetary policy, especially concerning QE tapering. Interest rate derivatives constituted over half of CME’s overall volumes at 9.2 million trades per day – up from 7.2 million contracts per day in Q3 and 4.8 million contracts per day in the year ago period. Rising in trading activity for interest rate derivatives began in August, as traders began to speculate when the Fed will start raising interest rates in 2015. This speculation led to a record 211 million interest rate contracts traded during the month of October. At the end of October, the Fed announced that it was ending the QE program and has confirmed that interest rates will rise, though with no clear indication as to when. However, interest rate derivative trading has been slow in November thus far, with only about 6.2 million contracts traded per day. The surge in interest rate trading seems to have subsided, at least for now. We currently forecast CME’s interest rate derivatives trading volumes for the full year to be 12% higher than the prior year period at 6.7 million contracts per day. Foreign exchange derivatives trading volumes were suppressed from September of last year through August 2014 – twelve consecutive months of year-on-year declines in trading activity. Trading picked up in September, with the number of contracts traded per day crossing the 1 million mark during September for the first time since November 2012. The rise in volumes since August is attributable to growing speculation among traders about possible changes in monetary policies from the Fed and the European Central Bank. The Fed announced the end of the QE program, which could help increase Treasury yields. On the other hand, the ECB announced that it would be reducing rates, which led the Euro to a one-year low. The surge in FX trading continued through October, with an average of 986,000 trades per day – 53% higher than the year-ago period. FX derivatives trading could remain high through the end of this year, due to which we forecast an average of 750,000 trades per day for FX contracts. Metal derivative trading rose by almost 10% y-o-y to 330,000 trades a day in October, while trading activity has further risen to just under 480,000 trades a day in November thus far. Additionally, the company announced that it will launch low-grade iron-ore futures starting December, to further boost volumes. The company expects strong sales for metals in the coming months as it raised the position limit for Copper to 1,000 lots from 400 currently. CME’s commodities trades rose by over 30% y-o-y to 1.3 million contracts per day in both October and November. We forecast commodities and metals combined to trade an average of over 1.4 million contracts for the full year. According to our estimates, CME’s adjusted EBITDA margin in the most recent quarter was almost a percentage point higher than the prior year quarter at 65.4%. Since most expenses incurred by exchanges are fixed in nature, revenue growth for CME had a direct impact on the company’s margin improvement. Higher trade volumes through the end of the year could help the company post healthier margins. We currently forecast CME’s adjusted EBITDA margin to be around 65% for 2014 with a gradual rise to 70% through the end of our forecast period. We have an $80 price estimate for CME’s stock, which is roughly in line with the current market price. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research Like our charts? Embed them in your own posts using the Trefis WordPress Plugin.