VALUATION HIGHLIGHTS

1. Clearing & Transaction Fee constitutes 80% of the Trefis price estimate for CME Group's stock.
2. Market Data constitutes 13% of the Trefis price estimate for CME Group's stock.

WHAT HAS CHANGED?

Latest Earnings

In Q3 2024, CME Group's revenues increased 18% to about $1.6 billion. Growth was driven primarily by higher clearing and Transaction Fee Revenue, which increased 20% on record quarterly volume. Adjusted Net Income stood at $977 million, up 19% from Q3 last year.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below we look at key drivers that present significant upside or downside potential to our price estimate for CME Group.

• Average Daily Volume of Interest rate Contracts The most significant driver of CME Group's stock is the average daily trade volume of interest rate contracts. The expected rate hikes due to improvement in macro conditions should likely lead to higher hedging activity and, therefore, more volumes. The consistent rate hikes over the prior year and a half have increased volatility in the interest rate derivatives market. We saw the volumes rise from 5.90 million in 2013 to 10.8 million in 2022. We estimate that average daily trade volumes will increase to nearly 14.8 million by the end of our forecast period.


• Average Daily Volume of Energy Contracts Another big driver of CME Group's stock is the average daily trade volume of energy contracts. As the economy eventually improves, we should see increased energy demand and movements in energy prices, likely leading to higher hedging activity and, therefore, more volumes. The consistent shift in oil prices over the prior year has resulted in increased volatility in the energy derivatives market. We saw the volumes rise from 1.27 million in 2015 to 2.03 million in 2022. We estimate that average daily trade volumes will increase to nearly 2.61 million by the end of our forecast period. However, if the intense market competition results in lost market share for the company, volumes could remain mostly flat. Should that occur, there would be a downside of about 2% to the Trefis price estimate.

BUSINESS SUMMARY

The CME Group was the first publicly traded exchange in the world. The company operates futures and derivatives exchanges including the Chicago Mercantile Exchange, the New York Mercantile Exchange (NYMEX), the Chicago Board of Trade, and the Dow Jones Index Services. The company provides a marketplace and back-end financial infrastructure for administrating and setting up futures contracts and options on futures contracts.

Futures and options provide hedging opportunities for individuals and institutions to hedge themselves from market risks and potentially profit from them. Historically, the company has focused on agricultural products for farmers in the U.S. but has diversified into interest rates, foreign exchange, energy, metals, and other commodities.

SOURCES OF VALUE

Clearing and Transaction Fees:

A significant part of CME Group's revenues are derived from clearing and transaction fees, which include electronic trading fees, surcharges for privately negotiated transactions, and other volume-related charges for contracts executed through its trading venues. The fees are calculated per contract, and the revenue generated from the fees fluctuates with the trading volume.

Other factors affecting revenues are rate structure, product mix, trading venue, and the percentage of trades executed by members vis-a-vis trades executed by non-members.

Market Data:

CME Group receives revenue from disseminating market data to subscribers. Its market data services are provided primarily through third-party distributors. Subscribers have access to real-time quotes, trading data, and summary market data for fees that are charged monthly on a per-screen basis.

KEY TRENDS

Volatility in energy prices has a positive impact on energy contract volumes

Volumes generally increase during geopolitical or economic instability, which often results in volatility in oil prices. Accordingly, investors look to hedge their exposure (or earn profits on speculation). As we expect continued volatility, energy contract volumes should increase substantially.