Low volatility could be causing CME Group Inc.’s less-than-optimal performance in the stock market, as shares have fallen 11 percent this year to $70.26.
The Chicago-based company announced Tuesday that average daily volume in May was 13.0 million contracts, down 12 percent from 14.7 million contracts in the same month a year ago. Its total volume fell 16 percent to 273.0 million contracts from 323.5 million a year ago.
A drop in volume translates to falling revenue, since CME Group receives a fee for each transaction made on its four exchanges. CME traded as high as $84.64 on Dec. 18 and as low as $66.95 on April 11.
“We’re cautious on the volume outlook given the low volatility,” said Christopher Allen, managing director at New York-based investment banking advising firm Evercore Partners Inc, who has a neutral rating and a $72 price target on the shares. “That’s pretty much what it comes down to.”
The Chicago Board Options Exchange’s Volatility Index hovered between 11 and 14 in May, significantly lower than the VIX long-term average of 20.08. The VIX is a fear gauge for the S&P 500 Index, drawing from many factors, like economic reports and political events, to measure how much fear exists in the stock market.
When the VIX is low, investors generally have confidence in the market. But low volatility for most of 2013 and 2014 is also being seen as a warning that investors have become too complacent.
New York Federal Reserve President William Dudley said last month that he was nervous that “people are taking too much comfort in this low volatility period, and as a consequence of that, taking bigger risks.” The Fed was widely criticized for failing to douse high investor confidence in 2006 and 2007, also a period of low volatility, before the 2008 financial crisis.
A return to “normal” volatility would be a welcome development for the CME and other exchanges, with price fluctuations encouraging more trading and transaction fees.
Shannon Stemm, analyst at Edward Jones, wrote in a May 29 note that CME’s trade volume growth expectations are “heavily reliant on changing market conditions, which can be difficult to predict.”
CME shares fell 73 cents, or 1 percent, to $70.26 Wednesday, from Tuesday’s closing price of $70.99. CME’s trailing price-to-earnings ratio, at 23.39, compared with a p/e of 45.23 for its competitor, Intercontinental Exchange Inc., and a p/e of 17.72 for the S & P 500 index.
Separately, a U.S. Securities and Exchange Commission report filed Monday showed that CEO Phupinder Gill sold 49,000 shares of CME at $71.66 per share, or $3.5 million. Gill now owns 117,101 shares of CME.