Colin Barr

Following the money in banking, economics, and Washington

CME stands to cash in on trading frenzy

May 24, 2010: 12:14 PM ET

So who stands to cash in on both Wall Street's trading frenzy and Washington's effort to crack down? Try the exchanges.

Analysts at Goldman Sachs point to CME Group (CME), the operator of the Chicago Mercantile Exchange and other trading houses. Its shares jumped 4% to $330 in trading Monday after Goldman put the stock on its conviction buy list with a price target of $380.

Average daily volume at CME's core interest rate, foreign exchange, and equity futures-and-options business has surged 56% from a year ago in May, Goldman analyst Brian Foran wrote in a note to clients Monday. That will boost clearing and transaction fees, which accounted for 83% of revenue in the first quarter, CME filings show.

Ready to lift off?

Foran boosted his 2010 earnings estimate to $4.42 a share from $3.92, saying he believes the trading flurry could spill over into the third quarter.

But rising trading volume isn't the only reason Goldman is bullish on CME. The firm could start making money as early as next year on a plan to run a central clearinghouse for interest rate swaps, the over-the-counter derivatives that make up a huge share of a market that has received heavy scrutiny in Washington since the meltdown of 2008.

Goldman said it believes the interest rate swap clearing business eventually could be worth as much as $400 million annually, and CME is likely to face competitors including Nasdaq's (NDAQ) International Derivatives Clearing Group. Still, Goldman said Monday that CME "is likely to attract a significant part of that revenue given its strength in Treasury and Eurodollar futures activity."

And while investors are wondering how much financial reform will take out of the banks' pockets, the push toward clearinghouses and other moves to make markets more stable and transparent could help the exchanges.

CBOE Holdings, the operator of the biggest U.S. options exchange and CME's crosstown rival, is planning an initial public offering based in part on this notion.

"We believe significant opportunities exist to continue to expand the suite of exchange-traded options products and trading tools available to both institutional and individual investors and for the migration of activity from the over-the-counter market to exchanges," the CBOE said in its initial public offering documents.

Goldman sees the same opportunity. "It is difficult to envision a scenario in which more transparency, more clearing, and more electronic trading do not positively affect CME's business," Foran writes.

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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