CME Group tops profit estimates on higher market volatility

(Reuters) - CME Group’s fourth-quarter profit trounced Wall Street estimates on Thursday, as a broad market sell-off toward the end of the quarter prompted investors to rebalance their portfolios and boosted trading volumes.

Fears of a U.S. slowdown and the U.S.-China trade war spiked market volatility in the quarter ended Dec. 31, which helped exchange operators such as CME and Cboe Global Markets Inc earn more from clearing and settling transactions.

The company, however, warned that trading volumes, across many asset classes, have already started slowing this year.

CME’s average daily volume (ADV) surged 31 percent to 20.8 million contracts in the quarter, lifting clearing and transaction fees, its biggest revenue stream, 36 percent to $1.03 billion.

The company is now averaging 17 million contracts per day so far this year, it said, signaling the onset of a risk-off trading environment.

“It’s not unusual to see a market pause following periods of elevated volatility,” Chief Executive Officer Terry Duffy said on a conference call with analysts.

Macro economic issues such as Brexit, the trade negotiations and uncertainty over another potential government shutdown, have kept investors on the sidelines of trading in currencies, commodities, bonds and equities so far this year.

“Markets like clarity, and we’re hopeful that some of these issues I just outlined will start to get resolved,” Duffy said.

Goldman Sachs and Citigroup, two major U.S. banks, have also flagged a weak start to the year, when compared to last year on less market volatility.

CME’s peers Cboe Global Markets Inc, Nasdaq Inc and Intercontinental Exchange Inc have reported stronger-than-expected profits, driven by strong trading volumes.

Exchange operators have been diversifying toward market data services, in a move to reduce dependence on transaction clearing and settling business, which is influenced by market volatility.

Revenue from CME’s market data and information services business, which help investors to take trading decisions and minimize risks, rose 28 percent to $130 million in the quarter.

Last year’s expenses of the Chicago-based company rose 28 percent to $1.70 billion. Excluding license fees, the company expects expenses to be in the range of $1.65 billion to $1.66 billion this year.

The company's adjusted net income rose to $624.5 million, or $1.77 per share, in the quarter. Analysts had expected the company to report a profit of $1.72 per share, according to IBES data from Refinitiv.

Total revenue rose 37 percent to $1.24 billion.

Reporting by Bharath Manjesh in Bengaluru; Editing by James Emmanuel