CME’s Quarter To Be Driven By Increased Trading Volume
CME Group (NASDAQ:CME) is scheduled to announce its Q4 earnings on February 4. Last quarter, CME reported a 5% year-on-year (y-o-y) increase in revenues on the back of a 6% growth in transaction and clearing fees. Consolidated transaction fees, which account for over 80% of CME’s revenues, grew primarily due to a 29% increase in interest-rate contract trading volume, which more than offset stagnating volumes in other contracts and steady declines in average contract pricing. Continuing this trend from last quarter, the interest-rate contract trading volumes are up 29% y-o-y in Q4, which is why we expect CME’s performance in Q4 to be similar to last quarter.
We have a $73 price estimate for CME’s stock, which is in line with the current market price.
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Transaction Volumes And Revenues Likely To Drive Overall Growth
According to CME monthly reports, trading volume has increased by around 10% from the year ago level in each of the three months during the quarter. [1] It can be inferred from the chart constructed below that the main contributor for the surge in trading volume has been interest rate contracts, with trading volumes increasing 20%, 32% and 38% for the months of October, November and December, respectively.
FX trading was at a record high during the first quarter of 2013 owing to sharp fluctuations in the currency and a surprise announcement by Bank of Japan of a large monetary easing program. [2] However, since then foreign exchange trading has been consistently declining y-o-y and the trend is likely to continue. Commodities, metals and equity trading has remained nearly flat for the entire quarter.
YoY % Increase In Average Daily Volume (ADV) |
|||
October 2013 |
November 2013 |
December 2013 |
|
Interest Rates |
20% |
32% |
38% |
Equities |
19% |
-18% |
8% |
Energy (including ClearPort) |
1% |
2% |
16% |
FX |
-9% |
-7% |
-8% |
Commodities |
0% |
12% |
-10% |
Metals (including ClearPort) |
10% |
-9% |
-3% |
Total |
12% |
9% |
13% |
Although the average rate per contract (RPC) has declined y-o-y for almost all months in 2013 (except for the month of January), its impact has been limited, since it was more than offset by the growth in trading volumes. For the first three quarters, the average RPC was $0.764, a 6% decline from the same period in 2012. Comparatively, the average RPC for Q4 has been around $0.76, which is 8% lower than the year ago period. It could become a point of concern for CME rates continue to decline at a steeper rate than the increase in trading volume.
Market Data Revenue To Recover
In the first two quarters of 2013, CME reported a nearly 30% decline in revenues from its market data and information services segment. The company attributed the decline to a drop in subscriber count due to cost-cutting initiatives at customer firms. However, the market data segment contributed $78.6 million to net revenues in Q3, which was only about 5% lower than in the prior year period. Going forward, the company has announced a hike in its customer fees, from $70 per month to $85 per month, which could lead to a further reduction in its subscriber base. [3]
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Notes:- CME Monthly Volume Reports, CME Investor Relations, January 2014 [↩]
- CME FX Volumes Jump On Return Of Volatility, Forbes, April 2013 [↩]
- CME Data Fee Increase More Onerous Than Originally Thought, Huffington Post, December 2013 [↩]