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CME's Trading Volumes Pick Up But Pricing Pressure Remains

The CME Group ( CME ), the world's largest futures market operator, reported on August 1 that its revenue for Q2 2013 was around $816 million, an increase of 2.5% over the same period last year. As expected , the growth came primarily on the back of a 7.6% increase in clearing and transaction fees, which accounts for over 80% of the company's total revenue. Other revenue streams however remain under pressure. Income from market data and information services declined year-on-year by almost 28% while the revenue from access and communication fees dropped year-on-year by nearly 9%.

Our new price estimate for the company's stock is around $63, nearly 15% lower than the current market price.

See our full analysis for the CME Group

Trading Volume Lifted Clearing And Transaction Fees revenue

Q2 was exceptionally good for the CME group in terms of derivatives trading volumes. As volatility returned to global markets the exchange operator's total average daily volume (ADV) for the quarter increased 15.7% year-on-year. The growth in the exchange's interest rate products is especially noteworthy - average daily volumes in this category increase year-on-year by almost 33% on the back of speculation about the Fed's future monetary policy and the growth in the company's OTC interest rate clearing business. CME's European clearing house for OTC derivatives cleared on an average $41 billion worth of interest rate swaps every day in this quarter, triple the same in Q1 2013.

Going forward, we believe that interest rate volumes are likely to remain elevated in the coming quarters if the Fed continues to flip-flop on its plans to phase out its quantitative easing (QE) program. The CME group's interest rate swaps clearing business is also likely to see rapid growth because the U.S. Dodd-Frank Act and the European Market Infrastructure Regulation (EMIR) will continue to force more entities to clear these products over centrally cleared platforms. (See CME, NASDAQ And ICE Are Ready To Wrangle For European Market Share )

Average Rate Per Contract Likely To Decline

However, an increasing trading mix of interest rate contracts is putting a downward pressure on the company's overall average contract rates. As observed in the last few quarters, fees for interest rate contracts have been about 40% lower than the company average. With the recent spurt in interest rate trading activity, we can expect the company's average contract rates to dip further. In Q2 2013, for example, interest rate contract volumes shot up by 33% year-on-year whereas the ADV for all other products increased by only 3.5%. This caused the CME group's average rate per contract to drop by almost 8% year-on-year, mostly due to the aforementioned changes in the company's product mix.

The average rate is also likely to remain depressed in the future due to the heavy incentives given by the CME group in its energy contracts business. The CME group's average rate per contract for energy contracts declined by almost 16% year-on-year in Q2 2013 as it looks to gain market share from its arch rival, the IntercontinentalExchange ( ICE ).

Forecast Extensions

Our readers should also note that we have extended our forecast period for the CME group by one year, and have started calculating the price estimate for the stock in mid-2014. This is an annual exercise that we conduct for all the companies under our coverage universe.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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