Oil fall a boon to exchanges as trading picks up

Traders work in the S&P 500 pit at the CME Group’s Chicago Board of Trade in Chicago. While plunging oil prices are hurting some investors, they’ve been a boon to CME Group and Intercontinental Exchange.

Bloomberg

New York

While plunging oil prices are hurting some investors, they’ve been a boon to CME Group and Intercontinental Exchange.

Combined daily volume of benchmark crude futures jumped to the highest level since mid-October, boosting revenue for the exchanges, after Opec’s refusal to cut output pushed prices to five-year lows. November volume rose 12% from a year ago.

Volatility has more than tripled since July to the highest since 2012, offering investors more opportunities to profit from trading futures and options. Oil dropped last month the most since 2008 as US production grew to a three-decade high, output from Opec nations climbed and growth of global demand slowed.

“Volume drives revenue,” Niamh Alexander, an analyst at New York-based brokerage Keefe, Bruyette & Woods, said by phone. “The elevated volatility is generally good for trading volume. You are entering into a phase where there is a lot more positioning and uncertainty.”West Texas Intermediate oil and Brent have slumped more than 35% from the year’s highs in June, while shares of CME jumped 19% and those of Intercontinental Exchange 14% over the same period.

“As an exchange, CME Group is price agnostic,” Chris Grams, a spokesman, said in an e-mail, “Buyers and sellers trade our WTI futures and options on futures based on their own risk management or investment needs as well as macro supply and demand dynamics.”

Brookly McLaughlin, a spokeswoman for the Intercontinental Exchange, declined to comment on how the falling oil price will affect the company’s bottom line.WTI, the US benchmark, added 69 cents to $67.57 a barrel in electronic trading on the New York Mercantile Exchange.

Brent, the standard for more than half the world’s oil, gained 55 cents to $71.09 a barrel on the London-based ICE Futures Europe exchange.

Total volume of WTI futures on the Nymex and Brent on the ICE increased to 1.78mn contracts on December 1, the most since October 16. Energy trading volume jumped 25% in November from a year ago to average 1.92mn a day, CME said.

The trading of energy contracts accounts for about 20% of Intercontinental Exchange’s revenue and 17% of CME’s, according to Alexander, who has an “outperform” rating on both companies.

“The exchanges are making great money,” Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors, said by phone yesterday. “Volatility is high. There is more opportunity for traders and fund managers when you have bigger movements. The worst thing that the exchanges can have is a sideways market.”

“Opec certainly has sent waves crashing through the oil market,” John Hyland, chief investment officer of US Commodity Futures Funds, the Alameda, California-based manager of the US Oil Fund, said in an e-mail. “One impact, for USO, is that volume has pretty much doubled over the last week.” Another impact is the jump in volatility, he said.

Volume responded differently in earlier market crashes. It dropped 8.9% in the second half of 2008 as the global recession sent WTI tumbling to $32.40 in December 2008 from a record $147.27 in July. It surged 33% during the Asian financial crisis as oil crashed to about $10 in December 1998 from $27 two years earlier.

This year’s price slump already forced some hedge funds to close. Brevan Howard Asset Management, which oversees $37bn, is shutting its commodity fund run by Stephane Nicolas after losses this year, according to two people with knowledge of the matter.

The Organisation of Petroleum Exporting Countries, responsible for about 40% of the world’s oil supply, produced 30.56mn barrels a day in November, exceeding its 30mn target for a sixth month, according to data compiled by Bloomberg.