Trading activity has been up of late, as reported by major exchange operators and brokerage firms. CME Group reported a massive 25% year-over-year rise in trade volumes to an average of 16.3 million contracts traded per day in August. The global exchange operator has had a positive year thus far with high average daily volumes through the first half of 2015. As a result, the company’s clearing and transaction fee revenues in the first half of the year have risen by over 10% on a y-o-y basis to $1.4 billion. The growth spree has continued in Q3’15 thus far, driven largely by elevated trade volumes of commodities, foreign exchange, energy and equities derivatives. Below we take a look at CME’s August performance across key asset classes.
We have an $91 price estimate for CME's stock, which is in line with the current market price. CME’s stock price has fluctuated between $85 and $100 this year.
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Trading Activity By Asset Class
CME averaged 14.9 million contracts traded per day in Q1, which was about 10% higher than the year-ago period. Keeping up the trend, CME reported a 6% year-over-year rise in trading volumes in Q2 this year to 13.3 million contracts traded per day. Subsequently, the average daily volume rose to 16.3 million contracts traded per day in August, which is about 25% higher than August 2014 level.
Trading activity for energy products has been high since the fourth quarter last year, owing to volatility in oil prices, which helped the exchange operator in terms of natural gas and oil contract trading. At the time, CME also announced the launch of European natural gas contracts on its CME Europe in addition to the rise in trading volumes of energy contracts. As a result of the addition of natural gas contracts and continued volatility in oil prices, trade volumes for energy derivatives stayed over 2.1 million contracts traded per day through the March quarter, which was about 25% higher than the comparable year-ago period. Although the average daily volume subsided to about 1.7 million contracts per day through Q2’15 thus far, it was still over 20% higher than prior year levels. Volume has picked up again in Q3, with the ADV rising to over 2.1 million contracts per day in August – 46% higher than prior year levels. We currently forecast the average daily volume of energy contracts on CME’s platform to be about 1.8 million contracts per day for the full year. In the long run we forecast energy contracts to average 2.2 million per day by the end of our forecast period.
After suppressed foreign exchange derivatives trading volumes in the first half of 2014, volumes picked up in Q4’14 due to growing speculation about possible changes in monetary policies from the Fed and the European Central Bank. As a result, FX derivatives trading volumes stood at just under 1 million contracts traded per day in the December quarter. Since then, CME has witnessed a sustained period of high FX trading. The company averaged 954,000 trades per day in Q1, which was 17% higher on a y-o-y basis. CME reported an ADV of 903,000 trades per day in Q2, which was a massive 43% rise over the comparable prior year quarter. High trading activity for FX derivatives has continued in Q3 as well, with an average of 890,000 trades per day through August – a 33% year-over-year increase. We forecast FX trading volume for the full year to be about 15% higher than 2014 levels at about 930,000 trades per day.
Interest rate derivatives contributed to over half the total contracts traded on CME’s trading platforms in the last couple of years. The company reported a 12% y-o-y increase in ADV to 7.5 million contracts per day in the first quarter. However, the ADV of interest rate derivatives fell by 1% year-over-year to 6.6 million contracts traded per day in the June quarter. Volumes picked up at the end of May to 7.8 million contracts traded per day, with particularly high volumes observed prior to the Fed announcement confirming that interest rates would rise in late 2015. More recently, the company has witnessed a spike in interest rate derivative trades after trades began to speculate when the interest rates will rise following a statement released by the Fed at the end of July. We currently forecast CME’s interest rate derivatives trading volumes for the full year to be 6% higher than the prior year period at 7.5 million contracts per day.
Margins Likely To Improve Due To High Trade Volumes
According to our estimates, CME’s adjusted EBITDA margin in Q1 improved by over 60 basis points over the prior year period to about 68.5%. Similarly, the adjusted EBITDA margin in Q2 improved by over 250 basis points over the prior year period to about 67.5%. Since most expenses incurred by exchanges are fixed in nature, the rise in trading activity translated to healthier margins for the exchange operator. If CME can sustain high volumes in the coming months as well, it could have a positive impact on its revenues as well as margins. We are currently optimistic about the full year forecast for CME’s EBITDA margin. We forecast the adjusted EBITDA margin to improve by over two percentage points over 2014 to 68.7% for the full calendar year 2015, and subsequently to rise to over 70% through the end of our forecast period.
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