While the stock exchanges like Nasdaq and Intercontinental Exchange reported record numbers in the second quarter, CME Group (NASDAQ: CME) reported a drop in revenues. It turns out that the steps taken to support the economy by the Federal Reserve have worked against CME, largely because much of its business is in interest-rate products. This was an issue I talked about pre-earnings. So what actually happened?
CME Group is the world's largest derivatives exchange, encompassing the Chicago Mercantile Exchange, the Chicago Board of Trade, the New York Mercantile Exchange, and the Commodities Exchange. The company makes its money from clearing services (which is ensuring the buyer has the money, the seller has the securities, and then completing the sale) and transaction fees. CME also sells its pricing data to users.
Investors primarily use derivatives for hedging purposes, or risk management. One of CME Group's most important products is interest-rate derivatives, which let all sorts of users from banks to insurance companies to general corporations hedge their interest-rate risk. In the second quarter of 2020, CME Group reported a 7% drop in revenue, which was primarily driven by a 50% sequential decline in interest-rate derivatives trading. Average daily volume for interest rate products was 6.9 million. In the first quarter, it was 13.8 million, and a year ago it was 11.6 million.