CME beats profit estimates as strong hedging demand boosts trading volumes

Adds CEO comments in paragraphs 6,9,10; analysts' comments in paragraphs 4,5

By Pragyan Kalita and Prakhar Srivastava

Feb 4 (Reuters) - Derivatives exchange CME Group CME.O beat Wall Street estimates for fourth-quarter profit on Wednesday, as investors increased hedging activity to manage market risks.

Growing uncertainty over the economic outlook, including the pace of interest-rate cuts and rising geopolitical and trade tensions, has pushed investors to hedge more aggressively, lifting demand for equity-linked products and metals trading.

Total average daily volume $(ADV)$ at the world's largest derivatives marketplace rose about 7.5% to a record 27.4 million contracts.

"(The) quarter reinforces our view on strong ADV, widening volume drivers, strong margins and building capital return flex," TD Cowen analysts said in a note.

CME shares were last down 1.6%, with analysts at Jefferies pointing to quarterly expenses that were "modestly higher" than Street expectations.

CEO Terry Duffy on a post-earnings call dismissed concerns that AI could disrupt or disintermediate the business, as global software and technology stocks sold off this week on these worries.

PREDICTION MARKETS BOOM

Legacy exchanges to crypto-native platforms are stepping up their bets on prediction markets as investor appetite for event-based trading surges.

Interest in prediction markets climbed sharply during the 2024 U.S. presidential election, fueling rapid growth in users. That expansion has led critics question whether the products amount to regulated markets or gambling.

Duffy said CME was not ruling out political event contracts but would avoid smaller congressional or state races, adding that contracts on larger scale such as the U.S. presidential election are fine.

"We are not going to get bogged down in legal battles over whether this is sports gambling or swaps markets," he said.

The company launched a prediction markets platform in five U.S. states in December with sports betting firm FanDuel.

CME's adjusted profit came in at $2.77 per share for the three months ended December 31, beating analysts' average estimate of $2.74 per share, according to data compiled by LSEG.

(Reporting by Pragyan Kalita and Prakhar Srivastava in Bengaluru; Editing by Shilpi Majumdar)

((Pragyan.Kalita@thomsonreuters.com;))