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ANALYSIS: CME to capitalize on crypto and capital growth with product enhancements | News
CME Group, which has seen record trading volumes in recent years, plans to capitalize on innovations in its equity and cryptocurrency markets to drive further growth as continued uncertainty fuels activity in its flagship products.
Speaking to FOW ahead of the announcement of all-time record quarterly results last week, CME’s global head of equities, foreign exchange and alternatives said the U.S. group will leverage the approval of the First ether exchange-traded funds (ETFs) in the US to make changes to its growing market in crypto-ratio futures.
“We’re still looking for better ways to allow the market to trade bitcoin versus ether, which means more dynamic contracts around the ratio,” Tim McCourt said in an interview. “We have a fixed approach today, but we’re looking for improvements like physical delivery built into those contracts. The physical market is becoming more attractive as the ETF market develops and adoption grows, the barrier to receiving the underlying is receding.”
The second quarter saw a spike in usage of CME’s Ether/Bitcoin Ratio futures, as ether benefited from ETF approval speculation and bitcoin underperformed relativey. This dynamic drove opportunities as the basis shifted (see chart 1) with over $260 million (£202 million) of notional traded in the period, a quarterly record. The overall crypto complex saw average daily futures volume increase 117% year-over-year to 79,000 contracts, including a record for its micro ether contracts, according to data released by the exchange.
Graph 1
Source: CME Group
CME remains the market leader in bitcoin futures open interest, with $10.6 billion in open interest as of July 30, according to Coinglass data. CME has surpassed Binance as the leading venue for interest opened at the end of October last yearand has maintained that leadership position ever since. For McCourt, this was a justification for his focus on the most traded currencies.
“The fact that we’ve been able to maintain a leadership position in bitcoin and micro bitcoin futures in terms of open interest reinforces our belief that there is real strength in being the traditionally regulated venue in this space,” he added. “This has been a source of pride for the team here at CME, and we continue to focus on bitcoin and ether contracts for our tradable complexity and the regulatory clarity that exists there versus alternatives.”
CME is also considering building out the crypto options market it launched at the beginning of 2020. Options volume on its flagship bitcoin futures peaked at 12,763 contracts traded in March 2023, according to FOW Data, but that’s still just a fraction of the activity in CME’s futures market. The U.S. group traded 4,381 crypto options in June compared with 248,962 futures, the data showed. The company has has strengthened its industry expertise with the hiring of Priyanka Jain in its New York office this month as a director specializing in equity and cryptocurrency products.
“Options is growing, but there’s still a lot we can do to stabilize it,” McCourt said. “We’ve brought in some expertise with a new hire and are actively exploring ways to adapt our offering to the market structure that options traders are familiar with in this space. Traders typically have very short-term strategies, are used to short-term settlement windows and after-hours execution.”
Overall, CME Group’s second quarter marked the first period since 2010 that it saw annual growth in both average daily volume and open interest across all of its asset classes.
“When I look back over the last couple of years, the one thing that has been consistent across all the lines of business that I’m responsible for is that uncertainty has only increased,” McCourt said. “That’s true across all asset classes, both in how inflation is impacting not just the interest rate market but also the knock-on effect in the equity market. That can be at odds with other signals from macro data, so we see market moves that require hedging and repositioning.”
This has been driven by uncertainty, but it has also created opportunities among traditionally siloed markets, creating a unique environment for McCourt since he joined CME as managing director and global head of equities in April 2013.
“I’ve been at CME Group for over 11 years, and the fact that this wave of uncertainty is affecting all markets in one way or another is unique in 2024,” he added. “If you look at open interest in the first two quarters, all asset classes are up, options volumes are up. While we’re at a short-term low in equity volatility during that period, there’s significantly more volume than other comparable periods.”
McCourt started as an equity derivatives trader at JP Morgan in 2000, spending a decade at the U.S. investment bank before taking a delta one role at Royal Bank of Scotland. That experience in over-the-counter (OTC) markets has come in handy as CME has developed a deep pipeline of “futuristic” OTC alternatives like dividend and total return futures. That market grew 22% year over year to 111,000 contracts in average daily volume for the second quarter, according to CME results.
“The higher interest rate environment creates opportunities for people to trade in equity markets,” he said. “Which means that even with general alignment on the direction of travel for equity index levels, the cost of capital can vary by participant, thus affecting trading strategies as people disagree on things like the current value of dividends or the forward curve. Some of those things combined have helped drive that trend in options volume. We’ve made significant improvements that have enhanced that effect, with things like strike array optimization, block rule changes, and market maker protections coming together to support that demand.”
The U.S. group has a range of total return futures on equity indices, including those based on the Nasdaq, Russell, Dow Jones and FTSE indices, but the most traded is the one based on the S&P 500 TRF, which refers to its fixed effective federal funds rate, with 344,000 lots in June, up 99% from a year ago, according to FOW Data.
Overall growth in options on the exchange was 11% higher year-over-year in the second quarter, reaching a record daily average of 5.2 million contracts, according to data released by the exchange, which included a 28% increase in options on stock indices, to 1.6 million lots.
Media reports last month quoted Robinhood executives as saying it wanted to support CME crypto contracts on its retail-focused exchange. While McCourt declined to comment on the move, he said the Chicago-based exchange group has a long history of supporting retail flow into its markets.
“We’ve been harnessing the power of retail for years, it’s one of the fastest-growing parts of the business at CME Group,” he said. “The E-mini micro complex we introduced in 2019 remains the most successful product launch in our history. When we look at the launch of that suite across asset classes and the launch of event contracts, it’s certainly true to say that we’ve pivoted toward designing contracts with that single, active trader in mind.
“The exchange now has over 140 distribution partners worldwide and we are always looking for more. The growth of the cryptocurrency market has led to the advent of financial technology-oriented distribution platforms.”