May 1, 2014 / 4:05 PM / 3 years ago

UPDATE 1-CME addresses high-speed trading concerns; earnings jump

4 Min Read

(Adds comments from conference call)

By Tom Polansek

CHICAGO, May 1 (Reuters) - CME Group Inc sought on Thursday to calm investors' concerns about its exposure to possible U.S. regulations targeting high-frequency trading after the world's largest futures market operator reported a 13 percent rise in first-quarter earnings.

Chicago-based CME invited analysts on a conference call to question its executives about high-frequency trading, a practice that has come under scrutiny from U.S. regulators and law enforcement in the past month.

Stock prices for exchanges and brokerage firms have dropped since the release of Michael Lewis' book "Flash Boys: A Wall Street Revolt," with CME shares tumbling more than 6 percent in the past month. Lewis says the U.S. stock market is rigged, with exchanges and alternative trading platforms favoring high-frequency trading firms.

For CME, high-frequency trading accounted for about 30 percent of volume and less than 15 percent of revenue in the first quarter, Chief Financial Officer James Parisi told analysts.

"I'd say it's a fairly conservative number," he said.

CME, which owns the Chicago Board of Trade, Chicago Mercantile Exchange and other markets, said its net profit in the quarter rose to $266.8 million, or 79 cents a share, from $235.8 million, or 71 cents a share, a year earlier.

Excluding a $12.9 million tax expense due mainly to changes in state law, earnings were in line with analysts' expectations at 83 cents a share.

Revenue of $777.4 million was up from $718.6 million a year ago and beat expectations of $776 million. Trading volumes during the quarter jumped 9 percent, led by interest rate and equity products.

CME shares fell 1.3 percent to $69.46.

"Today's in-line results should not have a material impact on the stock, but we note that quarter-to-date volumes are lagging our full-quarter forecast," UBS analyst Alex Kramm said.

High-frequency trading is carried out by many banks and proprietary trading firms using sophisticated computer programs to send large volumes of orders into financial markets, executing a portion of them when opportunities arise to capitalize on price imbalances, or to make markets.

The practice accounts for more than half of all U.S. stock trading volume and is being probed by the U.S. Department of Justice and federal regulators.

CME Executive Chairman Terrence Duffy said he felt "very comfortable" that regulators and lawmakers he has spoken to understood the differences between equity and futures markets. The company will "continually draw the differences" to try to prevent CME from being swept up in regulation that does not necessarily apply to it, he said.

A group of traders last month sued CME, accusing it of providing high-frequency traders with early access to market data. However, the exchange operator made data available to all participants at the same time, Chief Executive Phupinder Gill said. The company previously said the lawsuit was baseless.

Gill defended as fair CME's co-location services, in which trading firms place their computers alongside those of exchanges to gain faster access to markets, because "anybody can participate." (Reporting by Tom Polansek; Editing by Jeffrey Benkoe and Lisa Von Ahn)

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