To a large extent, CME Group (CME) benefits from uncertainty in the markets. Volume in the trading of their derivatives tends to rise with a more volatile market. One caveat to this, however, is that taken to extreme conditions, as the following chart shows during 2009, CME Group no longer benefits as trading volumes drop. Minus this extreme, volatility and uncertainty remain a friend of CME Group.
|Daily Interest Rate||6,030||5,449||4,260||6,085||7,093|
|Total Trading Volume||3,386,716||3,078,149||2,584,891||2,978,459||2,249,632|
For the first quarter of 2012, average daily volume was down 11% in comparison to the first quarter of 2011. The unrest in the middle east, and the earthquake in Japan were significant enough to create very high volumes during the first quarter 2011 period. With the first quarter of this year creating steady returns, with low volatility, the 12% return enjoyed by the S+P 500 already surpassed many predictions for full year 2012 returns.
Volatility is expected to return by many, as uncertainties surrounding interest rates, a possible next round of quantitative easing, the culmination of events in Europe and our presidential elections combine to give the market some jitters. It appears to be potentially indicative of an environment CME Group would see increasing business in, in the months ahead.
More importantly for long term investors, of whose ranks I count myself, the use for the derivatives contracts CME Group engages in has been consistently growing for decades, and these unique contracts appear here to stay, and built upon, as CME Group has a track record of ever increasing the diversity of their products. A distinct competitive advantage over more traditional exchanges such as NYSE EURONEXT (NYX), which is seeing a substantial portion of trading volume in equities drained away from it by high speed trading "dark pools".
After the rampant growth experienced in the stock price after it went public in 2002, going from 40 dollars a share to over 700 in the span of 5 years, the stock has cooled considerably, to a more sensible, and finally an attractive valuation today. Rid of ridiculous P/E levels of over 50 it carried only a few short years ago, the company now sports one barely over 10. Meanwhile revenues per share, earnings per share and book value per share(which it finds itself trading at a discount to) all have continued to rise, while debt remains extremely low and the stock currently sports an attractive yield of 3.28%.
Disclosure: I am long CME.