Market volatility isn't bad for all stocks, and certainly not for all trading instruments. CME Group (NASDAQ:CME) has shown that it can maintain a healthy business even through a down market or a recession -- and grow right along with a booming stock market. In today's pandemic environment, does that make it a sure thing?

Making markets work

The CME Group is a derivatives marketplace, or really a conglomeration of several, and is the leading exchange of its kind. It's the end product of a merger between the the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade, which was previously the largest options trading marketplace. It has since taken over the New York Mercantile Exchange (NYMEX) and the Commodity Exchange (COMEX) as well, and now offers futures, options, and other derivatives trading.

The company now offers all of its services online and has a range of digital tools to help members and investors make the most of its products.

Trading screen with numbers and rising charts

Image source: Getty Images.

Somebody's always trading

CME Group's revenue has steadily increased as the company has made improvements to its platform and acquired new businesses that complement its operations. But most relevant is the volume of trading that takes place and shoots up when there's economic or political uncertainty. In 2008, the CME's share price declined even while revenue increased, and that's the current atmosphere, as well.

In the company's first-quarter earnings report, which covered the period ending March 31 and the beginning of the trading frenzy, revenue was $1.52 billion, up 29% from 2019, with the vast majority of the growth coming from clearing and transactional fees. Net earnings were $766 million, up 52% year over year, and earnings per share were $2.14, a 74% increase.

Average daily volume increased 45% from 2019. The logic behind the mass trading was hedging risk as stocks tumbled, which is why the company can perform well in any economy but even better in a volatile one.

One area of particular interest in the quarter was crude oil trading, which began to see deflating prices as supply soared and demand dropped, eventually going negative on April 20 before turning back around. CME was prepared for that possibility and managed it effectively.

As the economy remains in flux, there were continued increases in April, with ADV (average daily volume) up 13% year over year, energy ADV up 38%, and equity ADV up 119%.

But there are often some elements of instability even in a booming economy, and CME saw even greater increases.

What happens in the aftermath?

While business seems splendid as the world economy shudders, and CEO Terry Duffy was careful to show his compassion for the world at large while giving over the company's good news, does this mean that when the frenzy dies down the company will begin to see volume decelerate? 

What happened during the last recession is probably instructive. Toward the end of 2007, when the housing market began to collapse, taking Wall Street along with it, CME saw a 50% spike in trading volume and a more than 100% rise in revenue. These increases continued at high rates before tapering off around 2010, because in a normal economy, business is increasing, which balanced out the deceleration before picking up steam again. Currently, there are new avenues of growth to take some of the place of outsized trading volume that will fall as the economy recovers -- for example international trading, a less tapped market.

CME Group is a solid stock pick that has returned almost 14% on an annualized basis over the past five years. It's not cheap, with a trailing-12-month price-to-earnings ratio of 27 even at Thursday morning's prices, which are down about 10% since the end of 2019. But the company is about as secure as you can get, with an insulated model that has plenty of customers, ample room for growth, and no strong competition.