While market volatility and trading activity has remained low through the early part of 2012, market participants expect to bounce back through the remainder of the year.

Following record trading volume seen during the third quarter of 2011, exchanges had to cope with lower volatility and trading activity through to the end of the year. However, despite the tumult and uncertainty, there are signs of improvement.

“While macroeconomic conditions in 2011 were challenging, many believe that the U.S. economy is poised for a much better year in 2012,” said Craig Donahue, chief executive officer of CME Group during a conference call. “There are increasing signs that the zero interest rate policy of the Federal Reserve is finally getting some traction. Moreover, the economy is learning to live with greater policy and regulatory ambiguity. All of this suggests that the U.S. economy could realize better-than-expected real GDP growth in 2012 despite existing headwinds.”

“As we look towards 2012, there are some signs that the market is improving,” said Robert Greifeld, chief executive of Nasdaq OMX during a conference call. “However, challenges remain, and this type of environment creates uncertainty for market volumes. Clearly, the year has started slow, but we’ve faced similar challenges in the past and we have found ways to grow.”

Absent a surge in trading activity, CME’s venture into other business lines, including co-location as well as over-the-counter clearing will leave it in a good position to capitalize, regardless of the market uncertainty. Launching in mid-January, CME expects its co-location services to generate up to $45 million in incremental revenue, potentially growing to $100 million in three to five years. Rich Repetto, an analyst with broker-dealer Sandler O’Neill, said that the launch of co-location services is a big plus for CME, as it “supports revenue growth and increases CME’s mix of non-transaction revenue.”

CME has also cleared $209 billion in interest rate and $38 billion in OTC credit default swaps to-date. “The European crisis and overall market conditions have been a catalyst for customers to reduce counter-party credit risks through CME Clearing, well ahead of the implementation of the swaps clearing mandate,” said Donohue.

Market volatility has itself been volatile, as the Chicago Board Options Exchange Volatility Index indicated. Two and three percent intraday swings became the norm. The surges came in the wake of a slew of macroeconomic events, including the European debt crisis and the U.S. debt downgrade. The VIX reached a high of 48 on Aug. 8, as the markets reacted to the lengthy U.S. debt ceiling negotiations and the Standard & Poor’s downgrade of U.S. debt. As of mid-day Feb. 7, the VIX was trading at about 18.