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Investment Overview for CME Group (NASDAQ:CME)
Below we look at key drivers which present significant upside or downside potential to our price estimate for CME Group.
- Average Daily Volume of Energy Contracts The biggest driver of CME Group's stock is the average daily trade volume of energy contracts. As the economy eventually improves, we should see increased energy demand and movements in energy prices, which will likely lead to greater hedging activity and therefore more volumes. The consistent shift in oil prices over the prior year has resulted in increased volatility in the energy derivatives market. We saw the volumes rise from 1.27 million in 2015 to 2.43 million in 2016.We estimate that average daily trade volumes will increase to nearly 3.20 million by the end of our forecast period. However if intense market competition results in lost market share for the company, volumes could remain mostly flat. Should that occur there would be a downside of about 6% to the Trefis price estimate.
- Average Transaction Fee per Interest Rate Contract The average transaction fee per contract for interest rate contracts has been under pressure due to increasing competition. Also with ongoing technological improvements, the cost of trading has been coming down which allows the company to offer lower rates. Therefore we expect a gradual decline in average transaction fees. However, if the company is able to leverage its technological innovation to increase fees to about $0.64 by the end of our forecast period (as opposed to our estimate of $0.49) there could be an upside of about 5% to the Trefis price estimate.
The CME Group was the first publicly traded exchange in the world. The company operates futures and derivatives exchanges including the Chicago Mercantile Exchange, the New York Mercantile Exchange (NYMEX) and the Chicago Board of Trade as well as the Dow Jones Index Services. The company provides marketplace, back-end financial infrastructure for administrating and setting up futures contracts and options on futures contracts.
Futures and options provide hedging opportunities for individuals and institutions to hedge themselves from the market risks and potentially profit from it. Historically, the company has focused on agricultural products for farmers in the U.S. but has diversified into interest rates, foreign exchange, energy, metals and other commodities.
Clearing and Transaction Fees:
A major part of CME Group's revenues are derived from clearing and transaction fees, which include electronic trading fees, surcharges for privately-negotiated transactions and other volume-related charges for contracts executed through its trading venues. The fees are calculated on a per contract basis and the revenue generated from the fees fluctuates with the trading volume.
Other factors affecting revenues are rate structure, product mix, trading venue and the percentage of trades executed by members vis-a-vis trades executed by non-members
CME Group receives revenue from the dissemination of market data to subscribers. Its market data services are provided primarily through third-party distributors. Subscribers have access to real-time quotes, trading data and summary market data. Fees are charged monthly on a per-screen basis.
Volatility in energy prices has positive impact energy contract volumes
Volumes generally increase during periods of geopolitical or economic instability as this often results in volatility in oil prices. Accordingly investors look to hedge their exposure (or earn profits on speculation). As we expect continued volatility going forward, energy contract volumes should increase substantially.
Eventual increase in interest rates
Supported by the interest rates hikes by the Fed in 2015 and 2016, there has been a rise in its derivative volumes. With the expectation on a series of hikes in future, the interest rate contracts will continue to be in demand.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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