CME Group (NASDAQ:CME) is scheduled to announce earnings for the second quarter of 2012, on Thursday, 26th July. The exchange has had a rather eventful time in the last three months with a change in the pricing algorithm leading to vehement protests from floor traders and is looking to expand and diversify its operations in the U.S. and Europe. We discuss below a few key points to look out for when presents its report, later this week.
Pricing Change To Bring New Look
After years of cacophonic trading, floor traders are finding it difficult to compete with high frequency trading algorithms.  The volume of trade carried out via fast computer programs on CME’s electronic trading platform far outweighs the trades executed by open outcry. In view of this trend, the company has introduced a new price settlement methodology that will incorporate contract value from both floor trading and electronic trading venues to determine closing prices for grain products.
This move has been met with fierce protests from floor traders who believe that volume-weighted average price determination algorithm would greatly favor electronic trades and would make traditional floor trading obsolete. We however believe that the company is on the right track and is likely to see a boost in electronic trading in the near future. (See CME Rolls Out Grain Pricing Changes Despite Protests)
CME group recently extended trade timings for oilseed and options and futures from 17 hours a day to 21 hours a day. This move was primarily done to compete with IntercontinentalExchange (NYSE:ICE) who operate a 22 hour grain trade cycle and has paid off. (See CME Extends Trading Hours for Grains and Oilseeds To Attract More Customers) The exchange also introduced Short-Dated New Crop Corn options contracts, which observed a record 2,105 options traded on the first day of introduction and have not looked back since. (See CME Impresses With Record First Day Trading Volumes For New Crop Options) These options are issued on a weekly basis and are a very effective tool for agricultural producer customers to manage price risk and hedge against long term market volatility.
We expect the company’s innovations to drive a growth in average daily volume of commodity contracts through the Trefis forecast period.
With the U.S. Commodity Futures Trading Commission (CFTC) and the European Securities and Markets Authority (ESMA) making clearing through central counter parties (CCPs) for over-the-counter (OTC) swaps, mandatory, exchanges such as CME, NYSE Euronext (NYSE:NYX) and Nasdaq OMX (NASDAQ:NDAQ) are preparing themselves for the huge business coming their way.
Morgan Stanley (NYSE:MS) estimates OTC clearing to be worth about $3 billion in revenue opportunities. (See Futures Exchanges Talk Derivatives Reforms While Europe Burns) To capitalize, CME have collaborated with Bloomberg to set up a clearing link to process Non-deliverable forward (NDF) trades that are electronically executed on Bloomberg’s foreign exchange platform FXGO. We expect a big boost in clearing business in the coming years.
- CME GROUP VOLUME AND OPEN INTEREST REPORT 9:00 PM PRELIMINARY REPORT FOR BUSINESS DATE: 06/25/2012, CME Group, 25th June, 2012 [↩]