) 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 (
) 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.
See our full analysis and $323 price estimate for
We have a price estimate of $323 for CME's stock, which stands
above market price.
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
". 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.