Key Takeaways From CME's Q1 Earnings

CME Group ‘s ( CME ) stock price plunged nearly 5% as the company failed to meet the already-low expectations for its earnings. A reduction in the average trading rate per contract and market data revenues led to a marginal decline in Q1 revenues from the prior year quarter. Even the exchange’s trading volumes were only marginally up in Q1 2017; however, that is because of a tough year-on-year comparison due to the volatility seen in the global economy at the beginning of 2016 resulting from uncertainty around oil prices , a slowdown in China and slow GDP growth in the U.S. at the time.

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Transaction fees account for nearly 85% of CME’s revenue. Among the various asset classes, interest rate derivatives had the strongest trading volumes, and grew by 11% during the quarter, driven by the Fed’s interest rate hikes in December 2016 and March 2017. The continuous shift in gold and silver prices – due to the strengthening of the U.S. dollar and other economic and political factors in the U.S. – has continued to boost metals derivative volumes. However, equities and foreign exchange derivative volumes continued to decline, primarily due to a more volatile and favorable trading period last year, and partly due to investors remaining wary of these asset classes. Energy derivatives was on the negative side for the first time over the past couple of years. Without much movement in oil prices, and OPEC’s stance on capping production, the asset class hasn’t seen much trading activity of late. The increase in trading volumes of less expensive interest rate derivative contracts, and a decline in more expensive equity contracts, led to an overall decline in average rate per contract by over 3%. As the company continues to expand its product line and gain in trading volumes due to the recovery in U.S. macroeconomic conditions, we forecast a nearly 9% increase in transaction revenues.

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In Q1, the market data and information services segment saw 5% lower  revenues in comparison to Q1 2016, which the company believes is due to some large customers having consolidated their screens.  The company remains bullish on its market data and information services segment, with new products in the pipeline with enhanced business intelligence and machine learning capabilities. Since the company has already managed to gain traction by offering data services to its customers at no charges until last year, we believe these offerings across various product line is likely to be availed by customers even at a premium price, which the company expects to charge in the long term.

See the full Trefis analysis for CME Group.

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