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Lower Volatility Weighs on CME Group's Earnings

By Joe Tenebruso – May 6, 2019 at 3:27PM

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Weaker trading volumes took a toll on the exchange operator's profits in the first quarter.

A booming U.S. stock market has many investors celebrating. But shareholders of CME Group (CME -2.07%) may be a bit less cheerful, as less fear in the market led to lower trading activity in the first quarter -- and, by extension, lower profits for the exchange leader. 

CME Group results: The raw numbers

Metric

Q1 2018

Q1 2019

Year-Over-Year Change

Revenue

$1.1 billion

$1.2 billion

6%

Operating income

$741 million

$631 million

(15%)

Earnings per share

$1.76

$1.39

(21%)

Data source: CME Group Q1 2019 earnings press release.

What happened with CME Group this quarter?

Although heightened volatility was a powerful driver of CME Group's strong fourth-quarter results, calmer markets in the first quarter led to more subdued results. Average daily volume (ADV) declined 11% compared to the prior quarter, to 18.6 million contracts. "Market conditions changed significantly from the prior quarter and volatility did drop across virtually every asset class," CEO Terry Duffy said during a conference call with analysts.

CME Group's first-quarter ADV also represented a 16% decline from the prior-year period, with volumes falling in all of the company's core product lines.

Metric

Q1 2018

Q1 2019

Interest rates

11,948

10,313

Equity indexes

4,096

3,161

Energy 

2,754

2,331

Agricultural commodities 

1,593

1,381

Foreign exchange

1,100

885

Metals

713

561

Data source: CME Group. Numbers in thousands.

Yet these results were more impressive when viewed from a longer-term perspective. "Despite low levels of volatility in several product areas, we delivered our third-highest quarterly volume in our history during the first quarter, driven by continued product innovation and a growing proportion of our volume from customers outside the U.S.," Duffy said in a press release.

To Duffy's point, several new products enjoyed record trading volumes in the first quarter, including CME's Bitcoin futures. The company no doubt benefited from rival Cboe Global Markets' (CBOE 1.19%) decision to exit the Bitcoin futures market -- a move that could continue to boost CME Group's Bitcoin futures trading volumes in the quarters ahead.

In addition to successfully launching new products, CME Group is doing an admirable job of keeping a lid on expenses. Still, these cost controls weren't enough to offset lower volumes. In turn, net income -- adjusted to exclude acquisition, restructuring, and certain other charges -- fell 9% year over year to $579.2 million, or $1.62 per share.

Three signs labeled risk, profit, and loss

Image source: Getty Images.

Looking forward

Although investors enjoyed relatively peaceful markets in the first quarter, volatility always returns eventually. By positioning itself as one of the main places where traders can go to hedge their risk, CME Group stands to benefit.

Yet rather than rest on its laurels and wait for volatility to reappear in the markets, CME Group is investing in a host of new offerings. "We continue to launch innovative new products, tools, and services to support customer needs and to create capital and operational efficiencies for market participants," Duffy said. 

The company is also benefiting from rising international demand for its risk-management tools. "During the first quarter, all six product areas had an increase in their business from outside the U.S.," Duffy said. 

Risk will forever be present in the world's markets, and the more CME Group can help investors manage it, the more the exchange leader stands to profit in the years ahead.

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool recommends Cboe Global Markets Inc and CME Group. The Motley Fool has a disclosure policy.

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