CME GLOBAL NUMBER ONE
One way to judge one’s value is to have others measure it for you. In financial markets that measure is the market cap, so as the World’s biggest exchange, CME (US$64 Billion) is definitely doing something right. This is 31% larger than the global No.2, ICE, despite having only 74% of ICE’s revenues.
So what does CME have that makes the group so valuable? Global trading and liquidity based on an impressive line up:
• CBOT brings Financial Futures & Grain Commodities
• CME has Index Futures (with the S&P500 as King), FX Futures, & Farm Animal Commodities
• COMEX trades Precious Metals & Base Metals
• NYMEX covers Energy Markets
• NEX, a 2018 purchase complements CME with electronic OTC cash trading of Bonds and FX with a suite of analytics products
Yet when it comes to commercialising data and information, in 2019 CME’s market data revenues only comprised 11% of total revenue, a drop from 13% in 2010. The top 5 North American exchanges averaged 21% together in 2019, however, much of other exchanges growth has not been organic but by acquisition, notably ICE buying a market data vendor, Interactive Data in 2015
CME A DATA LAGGARD
In my article on North American Exchanges (https://lnkd.in/gCjdFSp) I argued trading financial markets is now data-centric, and exchanges need data strategies not only to grow information services but also drive trading back onto the exchange itself, because once clients start ingesting proprietary data and analytical models, it becomes incredibly ‘sticky’, almost an antidote to volatile transaction and listing fees. As competition from Eurex, ICE Futures, and the LME intensifies, data and related services will become a point of differentiation, especially with ICE and to lesser extent Eurex.
During the 2010s the CME’s data strategy was a simple 2 pronged approach, firstly significant (and unpopular) price increases, then secondly reduce revenue compliance leakage through audits, and in the process hired Ballintrae’s audit team
It has been anecdotally reported that CME’s goal is to grow the information services business as a percentage to match that of ICE, though ICE’s purchase of IDC sets an ambitious goal, but then CME is starting from a low base. Being late to the party is not necessarily a bad thing, CME can learn from others’ mistakes (and the others have made them), though it does mean some attractive potential partners have already had their cards marked, which then places premiums on those remaining
The irony is in 1988 CME was in advance of the time when it launched CME SPAN (Standard Portfolio Analysis of Risk), a portfolio margining tool using grid simulation to calculate margin requirements for futures and options
CME OPTIONS & OPPORTUNITIES
The big question: What strategy will the CME adopt in the 2020s in the datasphere?
CME remained relatively quiet in the 2010s while competing exchanges expanded into overseas venues, ICE buying a leading market data vendor, as well as index creators, evaluated pricing services, and a plethora of analytics businesses.
The jury is out whether these exchanges merely purchased revenue flows and a client base, or genuine value-added revenue multipliers. The 2020s will provide the answers.
CME has options and opportunities, will it become a data hunter? If yes what’s on the menu?
Capital rich, not so cash rich. At the end of 2019 CME reported reserves totalling US$1.7 Billion, with outstanding debt of US$3.7 Billion. HKEx’s bid for LSE failed on many levels, but none so much as not containing a substantive cash component, so for CME a blockbuster deal will preferably be equity based, but not necessarily welcomed. This might count Bloomberg out (Yes, I am serious, there is a logic).
There are some intriguing opportunities available, the individual selections are purely speculative, they might not top CME’s list, but I am certain due diligence will identify them as being the types of partnership CME could seek in the 2020s, based on the following criteria:
- Must be domiciled or have a major presence in the United States
- Services must include products that utilise or integrate with trading on CME’s 4 exchanges
- A client mix of existing and potential CME Group clients (not that there are many financial institutions not CME clients)
Keiren Harris 30/04/2020
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