CME Group Inc (CME) Reports Increased Profits as Volatility Rises

CME Group Inc (CME) Reports Increased Profits as Volatility Rises
By CME Group/Henry Delforn/Allan Schoenberg (CME Group) [CC BY-SA 3.0], via Wikimedia Commons

CME Group Inc (NASDAQ:CME) reported higher trading volumes and a 16% rise in earnings today coming on the heels of the US Federal Reserve announcing in December the beginning of “tapering,” the central bank’s decision to reduce its bond asset purchasing program that has suppressed the interest rate market.  The world’s largest regulated derivatives exchange saw volume on its interest rate products rise by 30%.

“There’s a tremendous amount of participants that are still on the sidelines waiting for the (tapering) program to completely end,” noted CME Group Inc (NASDAQ:CME) Executive Chairman Terry Duffy in a conference call with analysts.  Once tapering ends “then we will see some fluctuation in rates,” he said.  Once rates start to fluctuate “then we’ll see some proprietary trading shops that maybe have not been in there, and not the pure hedgers, but a lot of the high turnover guys.” High frequency trading firms entering the interest rate complex would be expected to propel trading volumes higher.

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Volatility leads to increased trading volumes

Centrally planned markets typically create trading environments devoid of short term volatility and market price trends, which can be felt across many of the markets CME Group Inc (NASDAQ:CME) provides trading opportunities to.  “Our other product areas had lower volatility during the year, including equities, FX, and agricultural products. The steady rise in equity market value during 2013 was not conducive for driving equity volume growth, although we outperformed our primary US peer,” CME Group CEO Phupinder Gill said. “However, over the last month, there has been a decent pickup in volatility impacting several products, and the volume across the board has responded accordingly.”

The CME Group Inc (NASDAQ:CME) has been on an aggressive push to drive volume from overseas markets, which now appears to be paying dividends. Gill noted that during the fourth quarter, Latin America volumes were up 36%, Asia and Europe volumes were up 12%, with North America up 8%.

SWAPs key barometer – can CME Group capture growth?

One area being closely watched by those familiar with derivatives exchange dynamics is the over the counter (OTC) SWAPs market, which is growing dramatically.  Observers are watching to see if CME Group can capture this growth, but the recent period was somewhat disappointing with revenue growth in this strategic area slowing.  OTC swaps revenue, which totaled $10.8 million, was down from the prior quarter.  This was “due to a mix shift, with a large sequential increase from our lower-priced high turnover clients,” noted Jamie Parisi, CME Group Inc (NASDAQ:CME) CFO and Senior Managing Director, Finance and Corporate Development.  In a positive sign Parisi noted that “we are seeing clients of traditional swaps ramp up their trading of our futures and options products. However, their use of our core products remains at the very early stages, in our view.”

The average daily volume at the exchange was 11.3 million contracts, 11% higher from the year earlier period. Revenue increased to $687 million from $660.9 million in the fourth quarter while net profit increased to $193.1 million, or 58 cents a share, from $166.8 million a year earlier, or 50 cents a share.  Despite the increase in earnings, they fell short of some analyst expectations due to a lower average fee per contract.

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)

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