The Intercontinental Exchange we see today is a result of the leadership of its founder Jeff Sprecher and his vision of digitising markets, creating networks, and improving efficiency.
Sprecher: "What we do is we own and operate critical financial networks. And we bring great technology to those networks to make them more efficient. We put proprietary content into those networks to facilitate the activity in those networks. And we harness the data that emanates from the activity in those networks, to make them stronger."
Intercontinental Exchange, which promotes itself as ICE, has grown from a small company facilitating trading in US energy derivatives to one of the world’s largest exchange groups. It owns the New York Stock Exchange and leading derivatives exchanges, servicing the energy, agricultural and financial sectors, and totalling 12 global exchanges and six clearing houses. The company provides essential data to fixed income and other financial markets and is providing technology and infrastructure to digitise the US mortgage market. It is this series of networks that management have created that are a key driver of ICE’s economic moat.
ICE’s quality extends beyond network effects to favourable industry structures and economies-of-scale advantages. ICE has created virtual monopolies in key derivative benchmarks, including Brent crude oil, natural gas, sugar, and European interest rates. ICE is vertically integrated – meaning it controls the execution and clearing of derivatives contracts – which enables the company to exert pricing power, attract volumes, and improve counterparty and systemic risk management. As one of the largest exchange groups, ICE generates substantial economies of scale from trading volumes and the data business.
The vision of management has been critical to ICE withstanding disruption. Management has steered the business towards attractive industry structures (derivatives exchanges), unique data sources, and value-add analytics. The shift away from equities exchanges has been critical to maintaining strong excess returns. Equities exchanges have been disrupted over the past 15 years, driven by several factors (industry structure, regulation and technology), disruption that eroded business economics (pricing power and volumes).
ICE, like all businesses, has risk exposures; as for most financial and technology companies, regulation is the key risk. For ICE, this means moves by regulators to separate execution and clearing, and actions that may reduce trading volumes; we don’t view this risk as likely for derivatives exchanges as liquidity fragmentation would lead to higher trading costs, halt innovation, and potentially increase systemic risks. ESG risks are also a consideration, but not a material risk for ICE.
ICE, like many financial services companies, has low carbon emissions and has little direct impact on the environment. ICE does, however, have a moderate exposure to fossil-fuel derivatives. There is risk to ICE as demand shifts from fossil-fuel derivatives contracts towards renewables and carbon-offset markets. ICE is well positioned in these nascent markets linked to decarbonisation, but becoming a benchmark takes many years to cement. Finally, ICE is well positioned on social and governance risk areas thanks to active employee engagement and management acting in shareholders’ interests.
Overall, we view that there is a solid growth opportunity from ICE’s core exchanges and data offerings that is complemented by a substantial growth opportunity in mortgages, creating a significant opportunity for shareholders in this high-quality business that is managing ESG risks.