In the wake of increased competition in the commodities market, CME Group (NASDAQ:CME), one of the largest trade exchanges in the world, has revised trade timings for grain and oilseed options and futures from 17 hours a day to 21 hours a day, with effect from May 20, 2012.  We believe this move will lead to increased market volatility as traders were used to a two-hour delay between the morning U.S. Department of Agriculture (USDA) report and the commencement of trading hours. Now, without this delay, analysts and traders will have to work harder than before to process and analyze data on the go while trading. CME Group has seen its dominance in the grain market challenged by competitor IntercontinentalExchange (NYSE:ICE) which operates a 22-hour grain trade cycle. Other prominent exchanges in the U.S. are NYSE Euronext (NYSE:NYX) and Nasdaq OMX (NASDAQ:NDAQ).
Back To The Futures
- CME Earnings Preview: Tepid Growth In Transaction-Based Revenues Likely
- CME Group: Trading Activity Slows Down in December, But Sets Volume Record For The Year
- Trade Volumes Up For CME Across Key Asset Classes in November
- Trade Volumes Down For CME Across Key Asset Classes In October
- High Trade Volumes, Market Data Drive CME’s Q3 Results
- Energy, Commodity Derivative Trade Volumes To Drive CME’s Q3 Earnings
With extended timings, we expect CME’s commodity trade volumes to rise and the markets to become more volatile as the removal of the 2-hour buffer between the release of the USDA report and the opening bell of the market will result in increased speculation among traders.
To stave off completion from ICE, which launched its electronic platform for the trade of corn, soy and wheat futures on May 14, CME has also announced short-dated crop options on grain and oilseed futures which are likely to attract more customers, who seek to manage risk during the growing season at a low cost. 
Commodity and Metal Contracts account for 19% of our price estimate of CME’s stock, and we forecast a bright future for the group in this division.
Expansion to Ward Off The Heat
Economic growth observed in Asia provides the perfect opportunity for CME to expand its business. The company saw a 10% rise in trade volumes across Asia and Europe in the first quarter of 2012. Its collaboration with the Bank of China as well as a stake in the Tokyo Commodity Exchange will drive the volumes, going forward. (see CME Group in Talks to Acquire a Stake in Tokyo Commodity Exchange)
CME is also one of the prime suitors for London Metal Exchange (LME) as NYSE Euronext dropped out of the race last week. The acquisition of LME would supplement the company’s metal exchange, COMEX, and would help consolidate its position in Europe. We will be closely monitoring the situation as the deal folds out over the next few months.
We have a price estimate of $285 on CME Group’s stock, about 10% above the current market price.Notes:
- CME Group to Start Expanded CBOT Grain and Oilseed Trading Hours, Press Release, 18th May, 2012 [↩]
- CME Group Announces the Launch of Short-Dated New Crop Options on Grain and Oilseed Futures, Press Release, 11th May, 2012 [↩]