Eurex Enters FX Trading Business, Could Force CME To Reduce Prices

CME: CME Group logo
CME Group

In its recent monthly volumes breakdown, CME Group (NASDAQ:CME) reported a decline in trading volumes in the last several months over the year-ago period across almost all derivative classes, other than interest rate derivatives, after a solid start to 2014. [1] Competing exchange operator NASDAQ OMX (NASDAQ:NDAQ) also witnessed a similar decline in trading volumes of derivatives during the current quarter. Among the various derivatives traded on CME’s platform, trading activity for foreign exchange (FX) traded products have been very low over the last year or so.

CME witnessed a strong demand for FX trading in the first half of 2013, largely driven by trading of Japanese Yen products. CME’s management mentioned that much of the demand at that time was coming from Asian markets. Overall trading volumes in Asia grew by 48% year-on-year in Q2 2013. [2] However, trading volumes of FX products suffered in late 2013 and early 2014 due to the benchmarking scandal and low levels of volatility. [3] As a result, the company reported a 28% y-o-y decline in FX traded products for the first half of 2014, with the average rate per contract (RPC) of derivatives down by 4% year-to-date.

Despite the slump, the company maintained a positive outlook for the year as it launched CME Europe at the end of March. The company expects FX trading to grow due to the increasing adoption of exchange-traded FX futures, which CME Europe is in a position to offer. More recently, the company witnessed a 14% sequential increase in FX trading volumes to 765,000 contracts traded per day in the month of June. [4]

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Impact Of Competition On CME’s FX Trading

Competing exchange operator Deutsche Boerse had an eye on the FX market in Europe with an intention to roll out FX trading on its Eurex exchange in the latter half of 2013. However, the company’s launch of FX trading was delayed due to a control issue with a partner bank. At that time, the German exchange operator indicated that it would be in a position to start trading of foreign exchange options and futures by the summer of 2014. [5]

Deutsche Boerse launched FX trading for six currency pairs on Monday, July 7 on Eurex. The six currency pairs include EUR/USD, EUR/GBP, EUR/CHF, USD/CHF, GBP/CHF and GBP/USD. Eurex is offering all contracts in a standard size of 100,000 currency units (the same as that offered by CME Europe). [6] The exchange operator aims to compete with large active players in the market such as CME and the IntercontinentalExchange Group (NYSE:ICE).

Eurex is offering competitive pricing for transactions on FX contracts. The fee charged by Eurex is about 10-12% lower than CME’s pricing on an average. [7] [8] This could weigh on CME’s trading volumes in the long run. However, it could take months before FX trading on Eurex gains traction given that it failed to attract any trades on its debut on July 7. [9]

However, if European customers start switching over to Eurex due to pricing concerns in the future, it could force CME to cut prices. We currently forecast the average transaction fee per contract for FX products to gradually increase from $0.88 in 2013 to $0.95 through the end of our forecast period. However, if CME is forced to slash prices by about 10% and subsequently continue to keep its transaction fee per contract close to current Eurex prices to sustain trading volumes, there would be a downside of about 2% to our $66 price estimate. Our price estimate for CME is slightly lower than the current market price.

On the other hand, the advantage that lies with CME is the range of products it offers. The company currently offers 30 currency pairs, which include the currencies of markets such as Mexico, China, Brazil, India,Turkey and South Africa. CME witnessed strong demand for FX trading in Asian markets, and the company believes that CME Europe can cater to its growing client base. [2] With significant trading activity coming from its Asian customer base and an established foothold in the FX trading market, we expect CME to sustain its growth in the near term without ceding share to Eurex.

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  1. CME Monthly Volumes, CME Investor Relations, June 2014 []
  2. CME Group Q2 2013 Earnings Call Transcript, Seeking Alpha, August 2013 [] []
  3. The FX Fixing Scandal, Reuters, March 2014 []
  4. CME Group Volume Averaged 12.7 Million Contracts per Day in June 2014, Yahoo Finance, July 2014 []
  5. Eurex hopes to steal march on rival CME with FX launch, FX Week, February 2014 []
  6. Eurex Launches New Offensive To Win FX Futures Business, EuroMoney, July 2014 []
  7. CME Europe FX Factsheet, CME Europe, July 2014 []
  8. Eurex Exchange FX Trading Fee, Eurex Exchange, July 2014 []
  9. Eurex Bullish Over FX Despite Flat Start, Futures and Options World, July 2014 []