CME Group (NYSE:CME) reported a 19% increase in its trading volume for 2010, averaging 12.2 million contracts per per day. CME’s main competitors include NYSE Euronext (NYSE:NYX), Nasdaq OMX (NYSE:NDAQ) and new stock exchanges like BATS Global and Direct Edge.
The Chicago Mercantile Exchange provides a marketplace as well as back-end financial infrastructure for administrating and setting up futures contracts (as well as options on futures). These contracts facilitate hedging strategies for market participants looking to reduce risk, as well as profit opportunities for those aiming to make speculative bets. The company historically focused on agricultural products for farmers in the U.S., but has since transformed itself into an electronic marketplace for financial futures and options.
We have a price estimate of $323 for CME’s stock, which stands above market price.
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- How Are Oil Prices Impacting CME’s Energy Derivatives Trade Volumes?
- CME’s August Trade Volumes Fall Across Key Asset Classes In August, Metals And Energy Derivatives Slightly Up
- CME’s July Trade Volumes Up On Continued Growth In Metals And Energy Contracts
- CME’s Q2 Earnings Grow On The Back Of High Trade Volumes
CME, the world’s biggest futures exchange, has seen improvements in trading activity in recent quarters following the financial crisis that drove banks and hedge funds to reduce their investing activity. The average trading volume for CME increased 19% in 2010 with a rise in trading volume across all of its products except for equities, partly due to lingering worries about the health of the U.S. economy. Interest rate contracts posted a 28% rise in trading volumes while foreign exchange, metals and energy contracts posted growth of 48%, 41% and 12% respectively. 
Current State of the Market
We have previously examined the Dodd-Frank rulings with respect to CME in our article “CME Group 10% Upside Potential on New Derivatives Rules“. New regulations require that derivatives trading should go through exchanges and be cleared through clearing houses. The new rules aim to reduce risk by standing between and guaranteeing both sides of each trade. In the present system, banks are still in control of the OTC derivatives trade and hold almost 97% of the $580 trillion OTC derivatives market that is not well regulated and or transparent. As the new rules are implemented, derivatives exchanges like CME should benefit from the increase in trading volumes.
Encouraged by an increase in trading activity, new competitors are entering the market. New York Portfolio Clearing (NYPC) which is a startup clearing house co-owned by NYSE Euronext, has gained approval from the U.S. Commodity Futures Trading Commission to clear interest rate futures in the United States. NYPC also plans to eventually clear over-the-counter interest rate swaps as Wall Street reform pushes these contracts into clearinghouses.  The Depository Trust and Clearing Corporation (DTCC) has recently revealed plans to open an office in Washington, DC to grab a bigger piece of OTC derivative market.
CME group is the largest derivatives player and is well positioned to benefit from the regulatory changes. We estimate that, along with Wall Street reforms, a shift to algorithmic and electronic trading will fuel growth in the average daily trading volume of energy contracts at CME from about 1.7 million in 2010 to 3.7 million by 2017.Notes: