As several new entrants look to break into bitcoin futures market, CME remains the sleeping giant

Derivatives giant CME is big enough to do whatever it wants in crypto. 

CME has dominated the market for bitcoin futures in the U.S. after its rival Cboe Global Markets shut down its similar product earlier this year.

But surprisingly, the Chicago firm isn't planning on pushing out the latest string of newbies looking to offer newfangled derivatives.

The growth of CME's market, which launched with much fanfare in 2017, has been "impressive" relative to the launch of other new products, Tim McCourt, global head of equity index and alternative investment products at the firm, said in the interview. 

"May was a record month in terms of [average daily volumes] and June was another strong month," McCourt said. "We traded $1.8 billion in a single day."

"I think when we look back, I would say where we are right now in Summer 2019, it is surpassing our expectations," he added.

Growing volumes 

McCourt isn't blowing smoke. In addition to steady growth in trading volumes, the total number of reported large open interest holders, or large traders, trading CME's bitcoin futures increased to a total of 56, according to The Block's estimates. An increase of 33% since last month. In total, more than 2,960 accounts have traded bitcoin futures on its exchange, according to a spokeswoman. 

As for volumes, ADV crest 13,600 contracts, worth $515 million in notional value, in May. 

It's striking CME has witnessed such success given it was second to the market after Cboe. Indeed, the exchange giant — which offers trading of futures and options — announced it would launch the new market just a few months after its president Bryan Durkin told Bloomberg News it wouldn't move forward with any products tied to the new market in the near term. Then-Cboe president Chris Concannon on the other hand, was telling media that the firm was excited to launch a family of products tied to cryptocurrencies like ether and bitcoin cash. 

Still, CME's executives are say the firm is focusing strictly on its cash-settled bitcoin product even while a number of rivals are lining up to launch new derivatives tied to the nascent market for cryptos. That includes the likes of Bakkt, SeedCX, and ErisX.

"This is something that we want to make sure we do correctly and bring more participants into the marketplace both on the trading side and the clearing side," McCourt said of the firm's strategy. "We're really just focused on bitcoin, because if we get that right, that's what is most important for our customers right now. Bitcoin is essential. It is our primary focus."

ErisX and Bakkt for their part are both preparing to soon launch physically-delivered futures tied to bitcoin, which proponents say are less susceptible to manipulation and allow traders to more effectively hedge their underlying bitcoin holdings. With cash-settled products, traders receive a cash payout at expiry. High-frequency trading firms like DRW have argued that such contracts are "inherently flawed." Several insiders have told The Block that a number of investors are sitting on the sidelines waiting for physically delivered bitcoin futures contracts. 

"We certainly welcome the innovation from others with respect to physical offerings, but when we look at our product we see the validation," McCourt said. 

Playing coy?

CME has played coy about its bitcoin ambitions in the past. That's playing into the skepticism several market participants have over their denial about exploring new cryptocurrency-related products. 

To be clear, a spokeswoman categorically denied those ambitions, noting:

"CME Group has no plans to launch physically-delivered bitcoin futures at this time."

Still, market participants note that it would be very easy for CME to spin up a new product for little cost relative to upstart exchange entrants. 

"There is an economy of scale that CME has due to their dominance," said Russell Rhoads, head of derivatives at industry consultancy Tabb Group, told The Block. 

He noted that it is not as risky for CME to launch a new product as smaller entities, including Cboe Global Markets. The $40 billion exchange group trades a quadrillion dollars worth of derivatives, as noted by my former colleague Matt Turner at Business Insider. 

That sheer size allows CME to "take a chance on things that their competitors pass on," as noted by Rhoads. 

That size has translated into a relatively liquid market for its bitcoin futures product. It also means the firm has a massive head start on cross-town Chicago rivals Seed CX and ErisX, according to insiders. CME, unlike the newbies mentioned above, already has large firms connected to its marketplace, trading its other products. 

Several hedge funds and traders told The Block that competing with CME might be a foolish ambition given its history of buying its rivals and squashing them. 

"Seed CX and Eris didn't set out to compete rather CME may want to do what they do," said Richard Johnson, a market analyst at Greenwich Associates. "It is similar to Facebook buying Instagram and WhatsApp."

Such a power move wouldn't be unfamiliar for the exchange, which purchased Nex Group for nearly $4 billion to cement its position in the market for U.S. government debt. 

For now, however, market participants will have to wait and see. 

"We have lots of ideas. We are always evaluating, considering, and validating," McCourt said.