Profit from trades made by other investors using CME Group

The fact that CME Group is one of the biggest exchanges in the world gives it a big edge over competitors

Exchanges like the London Stock Exchange, the New York Stock Exchange, and the Nasdaq are at the core of the world's financial markets. Their role in the market is simple but crucial. Exchanges connect buyers and sellers and make trade data public. They are also in charge of bringing assets to market, which can include contracts on commodities and interest rates as well as shares in publicly traded companies. The majority of exchanges only assist market participants in buying and selling, taking a cut for the privilege; they do not own the companies that are listed.

A little different is the CME Group (Nasdaq: CME). Unlike other exchanges, it owns the futures contracts that are traded on its platforms, making it the biggest futures and options exchange in the world. These include interest-rate futures, crude oil, cattle, bitcoin, and the E-Mini SandP 500 contract. For instance, the exchange trades over a million WTI oil futures and options contracts every day, with about four million open interest contracts. One contract in this instance is equal to 1,000 barrels of oil. The Three-Month SOFR Futures contract, which is used to hedge interest-rate exposure, is the most liquid contract on the exchange and, in fact, in the entire world.

Long-term potential exists for CME Group.

Its position in the market gives CME Groups an advantage. The more traders in the market, the easier and less expensive it is to buy and sell. Liquidity breeds liquidity. In addition to the scale advantage, the CME Group's position in the debt futures market puts it in a strong position to profit from the global government deficit boom.

However, the equity futures market is where the business is not exposed. It has some of the least exposure to the equity markets among all the major exchanges. Equity contracts accounted for 18% of total revenue in 2024, compared to 27% for interest rates, 13% for energy, and 10% for agricultural commodities.

The company's long-term potential can be inferred from its growth over the previous five years. In the first quarter of 2019, the average daily volume of contracts traded across its platforms was approximately 18 million; today, it is approximately 30 million. In the meantime, there has been a consistent rise in revenue per contract. UBS estimates that revenue per contract in equities will increase from £0.529 in 2022 to £0.635 in 2026. By 2026, it is anticipated that the total group average revenue per contract will have increased from £0.643 to £0.689.

On a contract-by-contract basis, that might not seem like much, but when CME facilitates the trade of 30 million contracts every day, the £0.689 in revenue each deal adds up. Since 2022, the company's Ebitda margin has increased from 67.4% to 70.3%.

Its offering includes trading as well. Market data is also sold by CME Group. This is starting to play a bigger role in all international transactions. Just 3% of LSEG's revenue comes from trading, the company that owns the London Stock Exchange. The sale of data, which is typically far more profitable than trading activity, accounts for 12% of the CME Group's total revenue. Due to growing demand, especially in the Asia-Pacific and Europe, Middle East, and Africa regions, CMEs' revenue from market data reached a record high in the third quarter, up 14%.

Expansion of the CME Group.

For CME, steady but profitable growth has been the rule. To speed up growth, it is currently taking advantage of two trends. Crypto comes first. In the third quarter, the group facilitated the trading of 340,000 contracts daily, an increase of more than 225 percent year over year. The group has introduced a variety of cryptocurrency contracts. The group intends to introduce 24-hour trading in order to accelerate this growth.

Increased trading in the retail industry is the second. With the help of trading apps and simple leverage, retail investors have flooded the US futures and options markets since the pandemic. The management is taking advantage of this growing market. It recently inked a deal with the sports betting site FanDuel that will give it access to about 13 million new retail accounts.

In addition, the exchange has introduced more flexible products like weekly agricultural options and one-ounce gold futures to enable trading in smaller volumes. The group is a leader in AI and machine learning in addition to these levers. It has been utilizing AI to introduce new products and shorten settlement, trading, and administrative times.

The revenue generator for CME Group.

CME Group has all the characteristics of a growth play, with several avenues for expansion in the upcoming years. Unusually for growth stocks in the US, however, it also has an income boost. Special dividends are added to the group's regular dividend. It paid out £10.80 per share last year and four regular quarterly dividends totaling £5 per share this year. The final special dividend, which was £5.80 last year, has not yet been disclosed. It is conceivable that the total dividend in 2025 will be more than £11 per share, or a 4% yield. CME is able to sustain this payout with an Ebitda ratio in the 70s and net cash on the balance sheet (net of regulatory assets).

Nasdaq CME Group.

According to UBS analysts, the stock is currently trading at roughly 19 times 2029 earnings given the current growth trajectory. For a company that regularly reports consistent, high-margin growth and has a track record of giving investors their money back, that is not at all demanding. Because of its exposure to cryptocurrency contracts, CME seems to be a desirable hedge against market volatility and uncertainty with an extra growth bonus.