CME Year 2016 In Review: Impressive Year Despite Industry-wide Decline In Trading Volumes

December 15th, 2016 by Trefis Team
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CME Group (NASDAQ:CME) has done reasonably well this year so far. Its revenues grew nearly 14% in the first 3 quarters of 2016 and the stock price has surged 35% since the beginning of the year. This can be attributed to the company’s continued efforts in expanding its global footprint and its diverse product line to suit the investors’ demand. In spite of an industry-wide decline in trading volumes, due to unfavorable macro-conditions and investors looking for safer investment options, the company has managed to grow its trading volumes by 8% year to date till October, due to its multiple avenues of investment. The decline in trading volumes across equities and foreign exchange was offset by a surge in trading activity across energy and metal derivatives. Consequently, we saw an increase in the clearing and transaction fees, which generates 85% of the company’s revenue. Here is what we think led to an impressive increase in trading volumes amid challenging conditions.

Interest Rate Derivatives Continued To Grow Under Fed’s Guidance

Interest rate derivatives have been the highest in terms of trading volumes, with around 5% year-to-date growth till Q3. Fed’s first interest rate hike in December 2015 post recession, had led to a significant increase in its derivative volumes in Q1. Though the growth in volumes have been low in the subsequent quarter, we expect marked improvement in its volumes in the current quarter, owing to expected rate hike in the near-term.

Oil-price Rally Has Led To Surge In Trading Volumes

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The demand-supply gap led to increased volatility in the oil market throughout the 2016. The oil prices have continued to deviate in both directions as the global supplies continue to remain high. This propelled 29% year-to-date growth in energy derivative volumes for the three quarters of 2016. Since the outlook for the restricted production of oil remains uncertain, we expect the market volatility to sustain in the near term, thus promoting the growth in trading volumes.

Metals Continue To Be Favored As A Safe Investment

Under the effect of slowdown in Chinese economy in the prior year, the investors had continued to look for safer investment alternatives. Precious metals have attracted a lot of attention over this time frame. Furthermore, the news of Brexit caused the metal derivative volumes to shoot up even further. The company saw 34% growth in trading volumes in 2016.

Equities Likely To Pickup Pace With Improvement In Macro-Conditions And Volatility

With the uncertain macro conditions hovering throughout 2016, equities and foreign exchange derivative volumes have continued to decline. Moreover, the Brexit news led to a decline in Euro trading volumes and also affected the company’s foreign currency reserves.

However, we expect them to recover in the current quarter with marked improvement in GDP, employment rate. The recently concluded U.S. presidential elections will possibly lead to increased volatility in the markets, with investors trying to assess the impact of Donald Trumps’s election on various industries and accordingly take positions in the companies’ stocks.

Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment / ask questions on the comments section
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to the full Trefis analysis for CME Group.

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