Among the diverse range of derivative contracts offered by the CME Group (NASDAQ:CME), energy futures and options contracts remain most valuable for the company. Apart from energy contracts, CME also offers trade in interest rates, equity indexes, foreign exchange, agricultural commodities, metals, weather and real estate. Its main competitors are NYSE Euronext (NYSE:NYX), Nasdaq OMX (NYSE:NDAQ) and Intercontinental Exchange (NYSE:ICE).
We have a price estimate of $330 on CME’s stock which is about 8-10% above the current market price.
Energy Contracts at a Glance
- CME’s Trading Volumes Down In January, Expected To Rise With Oil And Metal Volatility
- CME Earnings: Surge In Trading Volumes And International Expansion Favor Growth
- CME Earnings Preview: Impressive Growth In Trading Volumes To Propel Revenue Growth
- Increased Volatility In Derivatives Market Propels Trading Volumes For CME In December And 2016
- CME Year 2016 In Review: Impressive Year Despite Industry-wide Decline In Trading Volumes
- Massive Growth In Trading Volumes Across Most Product Line For CME In November
Energy products primarily consist of crude oil, natural gas, power and other energy-related exchange-traded contracts and over-the-counter contracts cleared through CME ClearPort. Future and options trading on energy contracts allow investors and brokers to hedge their investments and potentially profit from them. Energy contracts constitutes almost 24% of our price estimate of CME.
Customers choose to trade on CME due to its liquidity and transparency. Market liquidity, or the ability of a market to absorb the execution of large purchases or sales quickly and efficiently, is key to attracting customers and is a major strength of CME.
Key Drivers of Energy Contracts
The average transaction fee per trade increased in 2009 due to the pricing changes when CME took over NYMEX. The dip in 2010 was due to a faster increase in member trading volumes than non-member trading volumes as members receive lower rates than non-members. Moving forward, we expect the average transaction fee per trade to decline gradually by 1-2% per annum because of the growing competition.
There has been a steady increase in average daily volume of energy contracts over the past couple of years with an exception of 2008 due to the economic recession. The options contracts saw an increase in the volumes during 2009 in a volatile market scenario, since investors looked to hedge their investments. In 2010, the growth in volume was attributable to an improved economic outlook as well as increased liquidity within the energy futures market. We expect that the volumes will increase during the Trefis forecast period due to a shift in electronic trading.