CME Group Fights for Market Share Boosted by Competitive Pricing and Resilient APAC Demand

The Chicago Mercantile Exchange (CME), one of the world’s largest multi-asset exchanges by order flow and trading volume, has announced that its parent company, CME Group, is targeting a 20% market share in crude oil futures contracts in the foreseeable future. Brent Crude is currently the most popular energy product traded globally, taking CME’s market share from zero to 15% over the past 18 months.

In an interview with Reuters, Alan Bannister, CME’s Executive Director of Energy Products said: "We've only got to get up to about 20% market share and that would be bigger than heating oil and RBOB [gasoline]. That would make crude oil our third biggest product."

Geopolitics: Scarecrow or Catalyst?

Trading volumes in most oil derivatives including Brent have been capped in Q2 amid geo-political uncertainty. This has led to revenues at the CME declining 19% quarter-on-quarter.

CME Executive Chairman, Terrence Duffy, recently said: “Geopolitical uncertainty from conflicts in Israel, Ukraine and other hot spots kept energy traders on the side-lines." This disproves the assumption that higher uncertainty Leads to more Volatility and more trading volume as a result. In fact, trading venues often find the opposite. Uncertain times encourage traders to take risk off the table and reduce trade size and frequency.

Brent is an international benchmark based on production in the North Sea and is used to price more than 65% of the total global crude supply. Approximately 550,000 Brent futures contracts are traded daily at the CME.

There's Nothing Like a Discount

CME’s rapid ascension in the Brent Crude derivatives market can to a large extent be attributed to the aggressive pricing strategy implemented by the firm in 2013. CME is offering the Brent contract to traders for free and is providing an 80% discount on margin calls for spread trades between Brent Crude and West Texas Intermediate (WTI).

In an effort to drum up more publicity, Mr. Bannister was quoted as saying: “This is the biggest exchange giveaway that energy markets have ever seen. It's likely to be free or very cheap for a foreseeable future."

CME’s Brent Crude contract has been especially popular among proprietary trading firms where exchange fees claim a significant proportion of overall profit margins. Spread traders in particular, utilize large order sizes to go long and short simultaneously in contracts with different expiry dates.

It will be rather intriguing to see how CME market share fares if and when the discount rate ends. Proprietary traders (a significant constituent of recent growth) are notoriously picky when it comes to choosing trading venues but notoriously straightforward when it comes to trading costs - cheaper is better.

Turn up the Volume

In terms of volumes, Mr. Bannister confirmed that new Brent Crude order flow helped the CME Group achieve 10%-15% trading volume growth in the Asian and Pacific regions (APAC) in Q2 2014. Coal derivatives, where the CME has a 75% market share, has also “seen strong growth in Asia,” according to Mr. Bannister.

Trade volumes in CME's coal derivatives contracts for China, Australia and Indonesia spiked to just under 8,000 contracts in July from a monthly average of below 2,000 contracts in 2013.

Insatiable Asian demand for raw commodities and primary resources has helped the U.S LPG market attract increasingly more customers from Japan and China in particular. Trading in the spot Mount Belvieu, the Texas propane contract has been a hit with Asian market participants.

It's unclear when the CME expects to meet its 20% market share target or when the venue expects to ease off on its aggressive pricing strategy. After the discount rate finally ends, Mr. Bannister could well find that keeping market share is just as hard as earning it.