Volatility in financial markets can hurt investors, tossing the prices of their securities up and down seemingly at random.
But volatility can be good for financial exchanges. That’s because it often leads investors large and small to increase their trading activity, hedging or speculating on stocks, bonds, commodities and other assets.
CME Group Inc. (NASDAQ: CME), the world’s biggest derivatives exchange – mostly futures and options — has benefited recently from big moves in financial markets. (CME was originally named Chicago Mercantile Exchange.) It sees plenty of action from traders and investors in all kind of financial assets, including cryptocurrencies and contracts for prediction markets.
You’re surely aware of the rollercoaster ride for financial markets in recent years, thanks to everything from U.S. tariffs to Federal Reserve policy to the Russia-Ukraine war. Precious metals and many stock markets surged to record highs last year, while oil prices and cryptocurrencies fell.
So it’s no wonder that CME has chalked up a stellar financial performance. Last year marked its fifth straight year of record volume, rising 6% from 2024 to 28.1 million contracts per day on average.
Strength in numbers
That included records for interest-rate, energy, metals, agricultural and crypto contracts. CME’s international business also hit a record with 8.4 million contracts per day, up 8% from 2024.
Retail investors helped drive the overall trend. Average daily volume for micro products (smaller-sized contracts popular with individual investors) gained 59% in the fourth quarter from a year ago to a record 4.4 million contracts per day.
The exchange’s revenue climbed 6.4% last year from a year earlier to $6.5 billion, and net income gained 15.5% to $4.1 billion. That left CME with a hefty operating profit margin of 62% in the fourth quarter, unchanged from a year earlier.
The company is sitting pretty, says Morningstar analyst Michael Miller. “More than 95% of U.S. interest-rate futures trade on CME, the company has exclusive licenses to issue futures contracts on the S&P 500, Russell 2000, and Nasdaq indexes. And it is the dominant venue for trading [U.S.] oil futures,” he wrote in a commentary.
“We see its strong competitive advantages allowing CME to earn excess returns on capital for the foreseeable future.”
Prediction markets, 24-hour trading
The company isn’t standing pat. In December it launched a venture with FanDuel Predicts, offering event contracts on financial markets, economic indicators and sports in certain states. FanDuel is a unit of Flutter Entertainment (NYSE: FLUT). Also in December, DraftKings (NASDAQ: DKNG) debuted its predictions app, DraftKings Predictions, with CME as a distribution partner.
“While still early days, these products are delivering promising initial results and have generated traction with previously untapped customers,” said CME CEO Terry Duffy in the company’s earnings call Feb. 4. Over 68 million of these event contracts have traded in the six weeks since launch.
CME plans to expand trading hours for cryptocurrency futures and options to 24 hours a day, seven days a week in the second quarter. And it will look at the possibility of hosting 24-hour trading for other assets as well. It also plans to begin trading of single stock futures this summer.
To be sure, Morningstar’s Miller notes that CME benefited last year from “cyclically high volatility across multiple asset classes.” And that may not recur. But financial markets rarely stand still for long. So CME may continue to see growth in activity.
The author owns shares of CME.
Comments