Exchange and clearing revenue for the third quarter 2006 increased 49 percent to $123.2 million from $82.7 million in the third quarter of 2005. In addition, market data revenue rose 30 percent to $23.7 million in the quarter, up from $18.3 million in the third quarter of 2005. Third quarter operating income was $80.8 million, up from $32.9 million in the same period last year.
“This was another strong quarter for the CBOT, as we continued to build on our positive momentum and make significant progress on our global expansion strategy. During the third quarter we launched several important initiatives, strengthening our business model and better positioning CBOT for continued growth. We focused on meeting the needs of our diverse customer base, introducing electronic trading of our Agricultural futures during daytime trading hours, launching our new joint venture, JADE, which offers Asian-based commodities and continuing to enhance our Metals complex and capture greater market share,” said Bernard W. Dan, President and Chief Executive Officer of CBOT.
“Today, we also announced that a landmark agreement has been reached between CME and CBOT to merge the two organizations to create the world’s most diverse, global derivatives exchange. Moving forward, we are committed to working with CME’s leadership to close this transaction and unlock the tremendous potential we believe the combined company will deliver to customers and shareholders. I firmly believe that together we will be better positioned to compete globally and leverage the unique strengths of each organization to drive long-term growth.” said Dan.
Third quarter revenue growth was fueled by higher trading volume, an increase in the average rate per contract, and the positive impact of a market data price increase implemented January 1, 2006. The average rate per contract rose 23 percent compared with the same quarter a year ago primarily due to pricing changes implemented on July 1, 2006. Additionally, the average rate per contract was positively impacted by increased electronic trading resulting from the electronic trading of Agricultural futures during daytime trading hours beginning August 1, 2006. The average rate per contract represents total exchange and clearing fee revenue divided by total reported trading volume.
Trading volume for the third quarter was 199.3 million contracts, an increase of 21 percent compared with 165.2 million contracts traded during last year’s third quarter. Average daily volume (ADV) in the third quarter this year was 3.2 million contracts, up 23 percent compared with ADV of 2.6 million in the 2005 third quarter. In addition, ADV on the CBOT’s e-cbot® electronic trading platform, rose to 71 percent of total exchange ADV, up from 66 percent in the third quarter of 2005, reflecting the successful introduction and strong adaptation to the side-by-side trading of Agricultural futures.
Total operating expenses of $82.2 million were up 4 percent over the prior year’s third quarter. Volume-based expenses of $20.4 million rose 18 percent, in line with the growth in trading volume. Baseline and other costs, or non-volume based expenses, remained relatively flat at $61.7 million this quarter compared to $61.9 million in the third quarter of 2005, contributing to a significant boost in operating margin. The third quarter operating margin expanded by more than 20 percentage points to 49.6 percent from 29.3 percent in the same period last year.
CBOT Third Quarter 2006 Operational Highlights
-Introduced electronically-traded Binary options on the Target Federal Funds rate with much success, expanding its short-term interest rate product set.
-Introduced a new Global Developing Markets Program, furthering its strategy to expand global access to the CBOT’s markets.
-Experienced strong results in Five-and Ten-Year Swap futures following launch of market maker program with Citigroup and Goldman Sachs on July 3, 2006. ADV for September 2006 was three times greater than August 2006 and open interest had quadrupled at quarter end compared to July 3, 2006.
-Successfully launched Agricultural futures on the CBOT electronic trading platform during daytime trading hours on August 1, 2006.
Following the launch of side-by-side trading of CBOT Agricultural products, the complex hit a new daily record for trading volume as well as reaching records for electronic trading.
-Announced new process and delivery enhancements to its Metals complex, creating a more flexible trading environment.
-Announced plan to list Metal options in CBOT open auction markets, side-by-side electronic trading of the contracts in the fourth quarter.
-Announced plan to launch new a Dow Jones-AIG Excess Return Commodity Index futures contract. The contract was introduced on October 2, 2006.
-Announced a joint marketing initiative between Reuters and CBOT to promote access to CBOT markets via Reuters terminals.
-Announced changes to CBOT pricing and membership structure effective October 1, 2006. The changes focused on rewarding liquidity providers and further segmenting the fee structure.
-Launched JADE, a joint venture between the CBOT and SGX, on September 25, 2006, with a Natural Rubber futures contract, its first Asian-based commodity derivatives product traded on the all electronic Exchange.
-Accounted for 52 percent of all listed Metals futures traded in North America for the month of September, up from only 7 percent in September 2005 and 40 percent in June 2006.
Outlook
Given current market conditions and what is known today, CBOT Holdings currently expects the following for the fourth quarter of 2006:
-Baseline and other expenses, which equal total operating expenses less volume-based expenses, of $62 million to $65 million, including about $500 to $600 thousand of non-cash stock based compensation expense, but excluding incremental expenses expected to be incurred in connection with the merger.
-Volume based expenses which include clearing costs and contracted license fees of around $0.103 per reported contract.
-An increase in the overall rate per contract from the current rate of about 3 to 6 percent.
-Diluted shares outstanding of approximately 52.9 million.
