Exchanges Resilient Through Low Volatility

Terry Flanagan

Despite depressed volatility putting a damper on trading volumes, exchanges are still being able to show resolve.

“It’s safe to say that the volume has been down across the board,” said Phupinder Gill, president of CME Group during a conference call. “What is encouraging is the overall tick-up from year-end in terms of open interest. So while volatility is dampening the volume activity of our client base, the open interest across the board is up about 15% compared to year-end last year. And they’re seeing a pick-up in activity from the asset managers.”

Gill, who has been at CME for over 20 years, will take over as chief executive of CME following Craig Donohue’s retirement. Originally slated for the end of this year, the transition has been moved forward and should be complete in the coming weeks.

“I think one of the interesting things about volatility and looking at traders’ behaviors, is volatility might be low but prices are already either all-time highs or all-time lows, which is only telling you one thing: volatility has to increase,” said Terry Duffy, executive chairman of CME. “If you look at the price of nat gas at a 10-year low, or the price of WTI and Brent at all-time highs, the price of the interest rates is low. And food products are trading at very high numbers, but the volatility is low. So we’re looking at historical prices, both low and high, but no volatility. That equation has to change. It’s only a matter of pure fundamentals. It will change.”

Average daily trading volume at the CME fell 11% to 12.3 million contracts during the first quarter compared to a year ago, when activity was boosted by high volatility amid unrest in the Middle East and the Japanese earthquake. Revenue fells to $775 million, from $831.6 million a year earlier. Net income was down to $266.3 million, from $456.6 million a year earlier.

The company plans to enact a host of cost saving measures, including employee lay-offs and the sale of the Chicago Board of Trade Building in Chicago.

Market volatility has been relatively low through the first quarter of 2012, as the Chicago Board Options Exchange Volatility Index indicated. It has remained below 20 for most of the year thus far, absent a handful of short-term spikes. Two and three per cent intraday swings became the norm during the second half of 2011, culminating in a high of 48 seen on August 8. The volatility late last year came in the wake of a slew of macroeconomic events, including the European debt crisis and the U.S. debt downgrade. As of April 27, the VIX was trading at about 16. A mean reading of the VIX is approximately 20.

“Volatility tends to be episodic,” said Robert Greifeld, chief executive of Nasdaq OMX, during a conference call. “In terms of volume, you have short-term spikes based upon volatility, which we’ve seen in the last two years. But that tends not to be sustainable over time.”

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