Robust Trade Volumes Drive CME’s Q1 Earnings
CME Group (NASDAQ:CME) announced its Q1 earnings on Thursday, April 30, reporting an 8% rise in net revenues to $843 million for the quarter. Growth was largely driven by an increase in trading activity through the quarter due to which clearing and transaction fee revenues grew by nearly 9% y-o-y to $708 million. Furthermore, market data revenues registered 10% growth over the prior year quarter to $98 million in Q1. [1] According to our estimates, CME’s adjusted EBITDA margin in Q1 improved by over 60 basis points over the prior year period to about 68.5%. Since most expenses incurred by exchanges are fixed in nature, the rise in trading activity translated to healthier margins for the exchange operator.
We have an $88 price estimate for CME’s stock, which roughly in line with current market price.
See our full analysis for CME Group
Elevated Trade Volumes Through Q1’15
CME witnessed low trading volumes across most derivative classes including interest rates, energy, equities, metals and foreign exchange in the first half of 2014. However, trading activity picked up from Q3 with trade volumes rising by over 12% y-o-y to 13.5 million contracts traded per day, as traders began to speculate when the Fed will start raising interest rates later this year. Volumes surged to 14.8 million contracts traded per day in Q4, with a rise in volumes across all asset classes. [2] The exchange operator witnessed a sustained period of elevated trade volumes in Q1’15, with an average of 14.9 million contracts traded per day – about 10% higher than the year-ago period. Management mentioned that this was a record quarter with the second highest average daily volume (ADV) ever.
Back in October 2014, the Fed announced that it was ending the QE program and confirmed that interest rates will rise. [3] As a result, interest rate derivative trading subsided through the December quarter. The trend has reversed since the start of the year as activity has picked up in recent months. CME averaged about 7.5 million interest rate derivative trades per day through the March quarter, about 12% higher on a y-o-y basis. The surge in interest rate derivatives trading had seemingly regained momentum, as traders began speculating on interest rates in Europe. However, activity dropped since mid-March when the Fed announced that interest rates will rise later this year. We have a conservative forecast for CME’s interest rate derivatives trading volumes for the full year at 7.4 million contracts per day, which is a 6% y-o-y rise.
CME witnessed high trading activity for energy products during the March quarter due to volatility across oil prices. The exchange operator has enjoyed a sustained period of high trading volumes for energy derivatives including natural gas and oil contracts. On average, over 1.8 million energy derivative contracts were traded on CME’s platform in Q4, compared to 1.6 million contracts traded per day for the full year. Moreover, CME announced the launch of European natural gas contracts on its CME Europe in addition to the existing rise in trading volumes of energy contracts in December 2014. [4] The contracts have been made available on both the Clearport and Globex platforms. As a result, the ADV further rose to about 2.1 million contracts traded per day through the March quarter, about 25% higher than the year-ago period. Much of the growth was attributable to the 60% y-o-y rise in WTI crude oil contract trade volume to 1.1 million contracts traded per day.
Foreign exchange (FX) derivatives trading volumes were suppressed in the first half of 2014, with CME’s average daily trades at about 725,000 trades per day. FX trading picked up in the last quarter of 2014 due to the growing speculation among traders about possible changes in monetary policies from the Fed and the European Central Bank (ECB). [5] The Fed announced the end of the QE program, which could help increase Treasury yields. On the other hand, the ECB announced that it would be reducing rates, which led the Euro to a one-year low. [6] As a result, FX derivatives trading volumes stood at just under 1 million contracts traded per day in the December quarter. The company witnessed high FX trading volumes through the March quarter at 954,000 trades per day, which is about 17% higher than the prior year period. Many of the large banks have also reported healthy trading activity for foreign exchange in their respective earnings reports. CME’s management expects FX trading to be impacted by upcoming election in the U.K. and the upcoming Fed announcements.
Market Data And Information Services Sustain Growth
Market data and information services contributed $98 million to CME’s top line in Q1 – 10% higher than the comparable year ago period. The company primarily attributed the growth to the elimination of fee waivers due to which the company charged $42.50 per month to professional traders. Moreover, the company received about $6 per month on average per screen from nonprofessional traders. The company gained about 50,000 professional trader accounts during the quarter and about 100,000 nonprofessional accounts. Despite a strong start to 2015, management expects market data revenues to be seasonally lower in the coming quarters.
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More Trefis Research
- CME Group Q1 2015 Earnings Call Transcript, Seeking Alpha, April 2015 [↩]
- CME Monthly Volumes, CME Investor Relations, January 2015 [↩]
- Yellen Says Rate Rises Could Increase Financial Volatility, Wall Street Journal, November 2014 [↩]
- CME Group Announces the Launch of a Suite of European Natural Gas Contracts on CME Europe, Market Watch, December 2014 [↩]
- CME Group FX Volumes Rise 20% as FED Speculation Reactivates USD Volatility, Forex Magnates, September 2014 [↩]
- Daily currency volumes rise in August as volatility picks up, Reuters, September 2014 [↩]