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CME Group profits tumble 31 percent in third quarter

The S   P 500 trading pit is fury activity right close market Chicago Board Trade October 25 2012.

The S & P 500 trading pit is a fury of activity right at the close of the market at the Chicago Board of Trade on October 25, 2012. | Al Podgorski~Chicago Sun-Times

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Updated: November 27, 2012 10:46AM



As trading volume goes, so go the revenue and profits at CME Group Inc., owner of the Chicago futures markets. The volume story, the company’s executive chairman said Thursday, is a “disaster.”

Accordingly, CME reported a 31 percent sharp decline in its third-quarter profit and a 22 percent revenue dip. As disasters go, there are a lot of bright sides.

One is that the owner of the Chicago Mercantile Exchange and the Chicago Board of Trade retains its market dominance, with an overwhelming share of U.S. futures trading. It’s also rolling in cash, with about $2.1 billion in its reserves.

The company plans to decide what to do with “excess cash” by yearend, perhaps sending some of it to shareholders. It also has an operating profit margin of 58 percent.

The problem is the business decline and its causes. On a conference call with analysts, CME Executive Chairman Terry Duffy said the company faces several challenges from the economy and lack of market volatility.

“This year was setting up for a disaster with volume from day one,” Duffy said. He cited flat markets, comparisons with periods of unusually high trading activity a year ago and a preference of investors and corporations to retain cash. Some concerns deal with politics, he said.

“With the fiscal cliff coming down the road, we’ve got a big issue here,” Duffy said, referring to mandated budget cuts and tax increases if there is no agreement in Washington on raising the debt ceiling. “This government of ours could be shut down if in fact certain things play out.”

But the futures industry labors under a cloud. Closures of the brokerages MF Global and Peregrine Financial, both of which lost customer money, have cost the industry its reputation.

“Some people are less confident in the integrity of the markets,” said Howard Tai, senior analyst at Aite Group, a research firm in financial services. “The futures industry itself currently has an image problem.”

Tai said the industry scandals have increased investors’ tendency to stay on the sidelines. Market volatility is slight because of the Federal Reserve’s decision to keep interest rates near zero, and there’s also a natural calm before the presidential election, he said.

More high-frequency trading firms, whose activities have come under scrutiny during several market glitches, also have curtailed their activity, Tai said.

All of that has hit CME, which makes 80 percent of its money from per-contract trading fees. The company, which also owns the New York Mercantile Exchange and is buying the Kansas City Board of Trade, said third-quarter profit declined to $218 million, 66 cents a share, from $316.1 million, 95 cents a share, in the third quarter of 2011. Revenue fell 22 percent to $683.2 million.

The results included a onetime tax charge of $16 million related to an acquisition. Without that charge, earnings would have been 70 cents a share. An analyst survey by Thomson Reuters I/B/E/S produced a consensus earnings estimate of 69 cents a share, but the revenue number was slightly below projections.

CME shares fell $1.55, 2.7 percent, to close at $55 Thursday. The shares have gained 12.9 percent this year.

The company said average daily trading volume during the third quarter was 10.8 million contracts, down 26 percent from the same period a year ago, which covered an exceptionally busy period when investors were preoccupied with the economic state of Europe.

James Parisi, CME’s chief financial officer, said the company has concentrated on factors it can control, such as reducing expenses and limiting incentives on trading fees.



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