CME Group Preview: Volume Growth in Commodity & Interest Rates Contracts
CME Group ( CME ) will announce its Q2 earnings on Thursday. Last quarter, the company reported a 20% increase in revenues and a 26% increase in operating income from the year ago period driven by strong commodities trading volumes. CME Group continues to introduce new products which help its customers to better manage risk as it aims to gain market share from other exchanges like NYSE Euronext ( NYX ), NASDAQ OMX Group ( NDAQ ) and IntercontinentalExchange, Inc. ( ICE ).
We have a price estimate of $323 on CME Group's stock which is about 10% ahead of the current market price.
Energy and Commodity Products
Energy and agricultural commodity products registered 23% and 47% increases in average daily volumes respectively during the last quarter. During the present quarter, the CME Group has started clearing 150 OTC energy and commodity products at CME Clearing Europe.
We expect more than 20% increase in average daily volume in energy and commodity products in this quarter.
Interest Rate Contracts
Interest rate contracts constitute almost half of CME's total trade volume and posted a 25% increase in the past quarter. Expectations of interest rate increases for U.S. Treasuries as well as macro concerns regarding the European debt crisis have led to increased trading of interest rate contracts. An increase in volatility in the long term interest rate yield should benefit CME in this quarter.
Average Transaction Fees to Decline
Rising volumes lead to higher rebates and volume related discounts which cause the average fee charged by CME per transaction to decline. In the last quarter CME's average rate per contract was down only 2% from first-quarter 2010 despite a near 20% increase in trading volumes. We expect to see a 3-5% decline in average transaction fees as the volume increases further.