CME Group (NASDAQ:CME) is expected to announce its Q3 earnings on Thursday, 25th October. The commodity exchange’s top-line will likely continue to be affected by low investor confidence leading to lower trading volumes. In the second quarter, the company reported a 5% year-on-year decline in revenues, which totaled $796 million, primarily due to a 9% decline in average daily volume (ADV) of contracts traded. The negative trend continued in the third quarter as the monthly ADV fell 21% in July with a 23% fall in the most-popular asset class – interest rates contracts. August provided a little relief and some signs of optimism were observed in September as the monthly ADV increased by 16% over the prior month.
Our $60 price estimate on CME Group’s stock is in-line with the current market price.
Commodities To Get A Boost From Acquisition
Of the six asset classes that CME facilitates trades in, commodities is a relatively minor class, accounting for just under 10% of overall volume of trades. This might be about to change as CME recently announced the acquisition of rival exchange, Kansas City Board of Trade (KCBT), for $126 million in cash.  KCBT is a big player in the hard red winter wheat futures market and will add to CME’s existing offerings of agricultural options. Agricultural commodities trading volume in the second quarter was boosted by CME’s decision to extend trade timings for grain and oilseed options and futures from 17 hours to 21 hours a day. The quarterly ADV for the asset class increased 11% year-on-year.
However, volume has been declining steadily since it reached its peak in June. The ADV for September was down 23% from June. Although this decline can be attributed to seasonal factors, the charm of extended timings might have worn off as the average volume for September is in-line with the value for last year. Reuters reported that CME might be looking to roll back the extended trade hours. 
CME has also introduced portfolio margining to allow customers to cross margin positions in over-the-counter (OTC) interest rate swaps and Eurodollar and Treasury futures. By offering lower capital requirements of up to 90%, the initiative will help attract OTC trades as clearing will be mandatory from early next year. CME currently offers clearing services for OTC transactions through its ClearPort platform, which handles mainly energy contracts. The ADV of energy contracts processed through ClearPort dropped steadily from January through July, this year, but August and September showed some signs of a revival as the average volume increased by 12% since July.
The figure is still 14% below that reported in the same month last year, but we believe that the Commodity Futures Trading Commission’s (CFTC) new rules requiring central clearing of all OTC trades will boost transaction and clearing revenues for CME in 2013.
Please read our article : CME Group To Allow Cross Margining To Gain OTC Market Share for more details on the new initiative.Notes:
- CME Group to Acquire Kansas City Board of Trade, October 17th, 2012 [↩]
- CME in informal talks on reducing grain trading hours: source, Reuters, 16th October, 2012 [↩]