Intercontinental Exchange: Looking Back
“We’ve grown every year since we went public in 2005, including during the financial crisis. Our ability to achieve such growth is directly tied to staying connected to our customers. Throughout all our lines of business — whether it’s innovating around clearing, exchanges, data, technology or listings — we’re focused on identifying the problems our customers are facing and creating solutions for those situations.” - Jeff Sprecher, Founder, Chairman & CEO, Intercontinental Exchange
Having continually evolved, answering the question of what Intercontinental Exchange exactly is has been a function of when exactly the question has been asked. When launched in 2000, it was defined as an energy trading company, with its sole platform, following three years of development, aimed at providing transparent pricing for electric utilities. Competition was assuredly stiff, but that was no deterrence for Jeffry Sprecher, the company’s founder. In mid-2001, ICE acquired the International Petroleum Exchange of London (IPE), further assisting the transition to electronic trading. Just a few months later, its major competitor, Enron, was embroiled in scandal and was quickly made toast. Heading into the following year, ICE had doubled its trading volumes.
The void left by Enron benefited ICE in several other ways. Counterparty credit risk was front-of-mind, and ICE’s private partnership, financially backed by numerous reputable firms, placed the company in the best possible light, allowing it to quickly gain market share on the back of its reputation—it was a neutral marketplace. There were no conflicts of interest with it acting on one side of trades as it facilitated the transactions.
As a definitive market leader, ICE began to expand contract and swap offerings. In 2005, the company moved IPE crude, Brent, and Gasoil to electronic trading and, later in the year, completed its IPO. Continued growth necessitated additional clearing solutions, leading to the acquisition of NYBOT and the internal development of ICE Clear Europe. Launched in the midst of the 2008 financial crisis, ICE Clear Europe showcased, once again, the company’s ability to excel during turmoil.
Outside of an ever-growing offering of derivatives and clearing solutions, the company gained a further critical role in equity markets with the 2013 acquisition of the NYSE Euronext. The New York Stock Exchange, founded in 1792, is truly unreplicable and is seemingly unshakable, having seen the financial crises of 1797, 1819, 1837, 1857, 1884, 1901, 1907, 1929, 1937, 1974, 1974, 1987, and the list goes on. It has also weathered numerous conflicts, including the American Civil War. Over the period, improvements in technology, such as the electrical telegraph and the automatic ticker apparatus, helped drive transactions away from other financial hubs, creating higher reliance alongside higher trading volumes, allowing the NYSE to not just survive but thrive. Now, with nearly all aspects seamlessly integrated electronically, there is little friction to prevent new contracts from being created and traded. There is no awkward shifting of physical resources and reallocation of pit space to accommodate; a customer can have a contract created, and so long as counterparties are found, it is an open invitation to drive new trading volumes.
Following the acquisition of NYSE Euronext, ICE acquired SuperDerivatives and Interactive Data Corporation over the next two years, leading to the creation of a substantially larger fixed income and data services business. The company’s unique datasets have become as critically important and irreplaceable as its exchange and clearing infrastructure.
Over the last eight years, ICE has ventured into the mortgage industry with acquisitions including Mers (mortgage serial numbers), Simplifile (electronic mortgage registry), and Ellie Mae (front-end mortgage software). More recently, the Black Knight acquisition has raised significant criticism, largely ignoring an exceptional track record and the straightforward rationalization of the deal. The mortgage industry is still, in many ways, archaic, with numerous silos and separate systems cobbled together to facilitate transactions. Just as various technological innovations have propelled other markets, ICE has a distinct opportunity, and it is difficult to envision it not succeeding simply because the plan is so sensibly customer-oriented. By creating a more robust software suite, ICE can consolidate aspects, from home search and mortgage application to mortgage servicing, as well as actions in between, while driving down total costs, reducing inefficiencies, and eliminating errors. These are distinct and immediate benefits to both mortgage seekers and countless intermediaries alike. In October of last year, shortly after the BK deal was finalized, Jeff Sprecher offered an exceptionally well-distilled explanation for this specific vision in an interview with FIA (emphasis added):
We’ve put together this—what looks so obvious to me—which is a front-end, the middleware, a network that hooks to all the clearing agents and counties, and then the settlement—the clearing house. What it should do is, because that’s all disparate right now, when you or I get a mortgage, we go find some lender and get a loan, and usually, then, someone else is doing the servicing, and another third party may actually own the note. It gets sold and goes into mortgage-backed securities and is in some kind of institutional interest rate fund. And so, you or I think, ‘Well, that’s our bank, and I have a relationship there’, but they have no knowledge of you once that happens. They don’t know whether you’re current or not, and so those banks depend on you or I going back to them if we want to refinance or buy a different house or pay off the mortgage as if they know about it. For the first time, if we put all that together, you’ll be able to have a life-of-loan infrastructure where all the parties will know who’s who and, more importantly, if the value of your home goes up—a lot of the data we provide is the data when you go on the various websites and see what your home is worth, if you’re in the US, anyway—for the first time now, we can say to the lender ‘This person’s home has gone up in value and their interest rate in the market has gone down. This would be a great time for you to suggest they refinance’, which doesn’t happen right now. Oddly, your lender, if you have a home, is marketing to you, hoping that they catch you at a moment in time when you have an interest in it, but they’re spending hundreds of dollars to market to a client they already have. The whole thing just seems a little odd, and I think we will be able to make it a much better experience.
Also, if you or I go on a website and buy a consumable product, like we’re going to buy toothpaste, when you go to check out, oftentimes, it’ll say, ‘Do you want to buy now or pay later?’ and in real-time, you can get financed on a completely consumable item, whereas the house, which has a foundation and can be seen from Google Earth, and you’re going to live in it— —it’s going to be one of the last things you leave; that takes sixty days. And you’re showing up with 20% down and an estimate of what the house is worth, and you’re gainfully employed, and you have a history of payments. That takes sixty days! So there’s something weird about it, and the goal is, as you’re filling out a mortgage application, you’re getting real-time underwriting going on, and the lender can just say, ‘Yeah, ok. Let’s go.’ And it will look a little more like buy now and pay later if we get it right.
Intercontinental Exchange, transformed from strictly an energy trading platform into its current form, can be defined as a provider of three critical services:
Education: Knowledge for parties to understand asset classes and risk.
Execution: Tools to price, buy, and sell assets.
Settlement: Protocols to appropriately transfer ownership of assets and payment.
While parts have been choppy at times, ICE has grown consecutively each year since becoming public in 2005, establishing itself as the largest exchange and clearing operator in the world. ICE Futures Europe has recorded record trading activity each year over that period, and multiple of the company’s contracts function as industry benchmarks. The added tailwinds of further digitization and connectivity bolster a formula set to drive incrementally higher-margin dollars into the coffers of the business. Like mortgages, so many markets and entire industries remain deeply inefficient. Over the following decades, ICE is sure to redeploy capital to enter, disrupt, and redefine many of them. Future pieces will be dedicated to specific transactional mechanics and their financial contributions.
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Ownership Disclaimer
At the time of publishing this piece, I own positions in Intercontinental Exchange.
Disclaimer
This publication’s content is for entertainment and educational purposes only. I am not a licensed investment professional. Nothing produced under the Invariant brand should be thought of as investment advice. Do your own research. All content is subject to interpretation.
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Additional Resources:
Intercontinental Exchange - public filings and investor presentations. Source
Excellent stuff!