Just about everybody knows that in casinos, the house always wins in the end. Although the Chicago Mercantile Exchange (NYSE: CME) would almost certainly not like being compared to a casino, the two do share a common trait. Win or lose, the Merc gets a piece of every commodity and derivative trade executed on its platforms.
With futures and derivatives trading continuing to grow prodigiously, the Merc saw a 29% increase in its net revenue for the first quarter. Although the average revenue rate per contract declined about 4% from last year, a 39% increase in average daily volume more than compensated for the price decline.
The Merc continues to see exceptional growth in electronic trading operations, and electronic volume made up about two-thirds of total volume for the quarter. Not surprisingly, then, the company's Globex platform grew 95% for the first quarter.
It doesn't appear that volume is in danger of trailing off any time soon. While the Merc averaged about 3.9 million contracts traded per day in the first quarter, volume is currently running near 5 million contracts per day.
Although the Merc is undeniably the dominant futures and derivatives trading entity in the United States, it still has room for growth. Not only is there ample opportunity to continue to convert pit-traded contracts to electronic trading, but also foreign exchange trading continues to grow significantly.
That's not to say the Merc faces no competition. As international futures and derivatives exchanges increasingly move to electronic platforms, customers are more and more willing to trade with whichever exchange has the best execution, the lowest fees, and the best liquidity. In other words, if traders can get a better deal by trading copper in London or wheat in Vancouver, they just might do that.
What's more, there is word that the combined NYSE-Archipelago (NYSE: AX) entity has designs on getting into the options, futures, and derivatives game. Though this could be a case of a company's eyes being bigger than its stomach, such a move would no doubt send ripples through the futures/derivatives trading world and could pressure pricing.
The Merc may not be the cheapest stock around, but its P/E and EV-to-FCF don't look out of line relative to the growth in the business. What's more, the Merc is a dominant force in its industry, and even though its economic moat may not be completely unassailable, it's pretty strong in its own right.
To some investors, futures trading may seem like gambling, but just as in gambling, it pays to bet with the house over the long haul.
For more house bets, check out these past Foolish takes:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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