Market Overview

Why is CME Rallying?


CME Group (NASDAQ: CME) is up sharply on higher volume, and has climbed over a point to trade near $235 with unusually heavy volume.

The jump in the stock's price follows a downgrade of the investment group last week, when Evercore Partners downgraded the company to "equal-weight." The company's stock price then hit its 52-week low on Wednesday, only to recover at the end of the week amidst rumors that the company would increase its holding of the Dubai Mercantile Exchange when its chairman, Ahmad Sharaf, cryptically told reporters, "The CME wants to expand its presence in the DME."

Since then, no substantial news has come from the group, which operates derivatives and futures exchanges in Chicago and New York City, but a surge in interest has helped the stock climb higher.

The downgrade of CME was inevitable, thanks to a variety of pressures.

Most notoriously, questions about the company's involvement in the MF Global scandal have raised eyebrows. CME Group had auditing authority over the firm, and is currently cooperating with the House Financial Services Committee as they investigate the extent to which the now-defunct investment firm used customer funds to prop up its failing operations.

A more structural concern is the lower volumes that exchanges have been experiencing in recent months, particularly exchanges that deal in riskier investments such as the derivatives and futures exchanges operated by CME Group. Lower volumes translate to lower revenues for companies like CME Group, raising questions of the value of the company's stock.

Finally, CME Group has had to combat rumors that there are efforts to spin off the firm's regulatory functions due to the company's dealings with MF Global. On Tuesday, CME Group CEO Terrence Duffy had to ensure investors in a CNBC interview that he was unaware of any political pressure to break up the company, despite statements by Representative Barney Frank (D., Mass.) in December that CME should separate its regulatory arm. Frank is also the head Democrat on the House Financial Services Committee. Frank also praised the group's integrity, lending confidence to the firm's position in the MF Global scandal.

Looking forward, CME seems to have already weathered the worst part of the MF Global storm, and no more questions are being raised about the group's failure to catch MF Global's mismanagement of client funds. Additionally, slow winter volumes might be a thing of the past, which would help CME's bottom line by increasing immediate revenues. If rumors are true of a more aggressive investment in the UAE, the company may also benefit from its growing futures market.

The market seems to have renewed confidence in the group as it corrects from an overreaction to the stock's downgrade and lingering concerns over MF Global. That confidence may grow in coming days.

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