CME Rebuffs Smaller Bitcoin Fans as Cboe Leads in Crypto-Futures

(Bloomberg) -- CME Group Inc. might be the world’s biggest exchange, but it lags behind a rival Chicago exchange in the nascent Bitcoin futures business. That’s partly a design decision.

The CME contract was built to “make sure that we did not attract the small retail participants,” Terry Duffy, chairman and chief executive officer of CME, said in a conference call Thursday to discuss quarterly earnings. “That’s not something that we wanted to be a part of, so our contract is much larger than our friends down the street’s contract. I think that is the prudent thing for us to do.”

The “friend” is Cboe Global Markets Inc., the winner in the volume battle so far. The companies launched their futures on back-to-back weekends in December. Traders are using Cboe’s product more, even when you account for the fact that CME’s contract represents five Bitcoin versus just one at Cboe. During the past five days, Cboe has seen about 7.5 times more volume, according to data compiled by Bloomberg. (You’d expect just five times more volume if the two companies were tied.)

Because CME’s contracts are five times more valuable, that might be keeping smaller investors at bay. Also, TD Ameritrade Holding Corp., the big retail broker, offers Cboe’s futures to clients but not CME’s.

“On the revenue side, it’s going to be I think a slow grower,” Duffy said. “Which is fine.”

To trade CME’s futures, investors must set aside collateral -- known as initial margin -- equal to 43 percent of the order’s value. That’s an unusually high figure for futures markets, a reflection of the risk and volatility in Bitcoin. Don’t expect CME to budge on that.

“The last thing I would ever want to do is to potentially lower the margins and just think that we could effectuate a tremendous amount of trade off of this,” Duffy said. “We will not do anything in the near term that we think that could increase the trade at the point of introducing additional risk to the system.”

CME on Thursday reported net income of $2.9 billion. The overhaul of the U.S. tax code approved in December boosted that figure by $2.6 billion because it reduced the company’s deferred tax liabilities. The exchange got more than $5 of revenue from each Bitcoin contract traded, much higher than the 74 cents it generated from all its derivatives.

©2018 Bloomberg L.P.