CME Group (CME), the world’s largest futures exchange conglomerate, encompasses the Chicago Mercantile Exchange, the Chicago Board of Trade, and the New York Mercantile Exchange. Its products include major stock, interest rate, commodity, and currency futures and options.
The recent financial market volatility has been good to CME, with investors rushing to its products for safety in some cases and to speculate in others. Yet it hasn’t been rewarded in the stock market recently for otherwise sterling performance.
For the third quarter through late August, trading volume on CME exchanges jumped 39 percent from a year earlier, according to Credit Suisse. CME scored record trading volume of 25.7 million contracts Aug. 9. That bested the 25.3 million-contract performance of May 6, 2010, the day of the stock market Flash Crash.
Nevertheless, CME Group shares recently traded 20 percent below their 52-week high.
Part of the reason for the stock’s weakness is that investors have soured on financial service companies in general. In addition, analysts and investors are worried that other exchanges will cut into CME’s business, particularly NYSE Euronext (NYX), with its interest rate derivatives.
CME certainly has some trends working in its favor. With investors so worried about risk in today’s financial environment, the company’s derivatives provide a measure of comfort. These instruments allow investors to trade through an exchange rather than over the counter. The growth of emerging markets should spark more derivatives trading as well.
In the second quarter, CME’s profit gained 8 percent to $293.7 million from a year earlier. And revenue rose 3 percent to $838.3 million.
Standard & Poor’s analyst Robert McMillan has a four-star buy rating on CME. “We
foresee strength in domestic products and expansion into new international markets,” he writes.
“Uncertainty about the direction of interest rates and the price of oil and gas should lead to a pickup in hedging and speculative activity.” The company next reports around Oct. 28.
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