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This article is about the publicly traded company that operates the exchange. For the exchange itself, please see The IntercontinentalExchange (ICE)
Intercontinental Exchange is a U.S. based exchange offering fully electronic trading of commodity futures, over the counter energy commodities, and primary goods such as natural gas and orange juice. Intercontinental Exchange serves as the marketplace where companies and investors, such as hedge funds, and traditional financial institutions, come together and determine commodity prices.The company earns the majority of its consolidated revenues from commission fees on over the couner trades. ICE also earns a substantial amount of revenue from market data. The company charges exchange fees (terminal fees and license fees) for real-time price information. together these are known as exchange fees.
Record oil prices have driven increasing trading volume growth for crude, gasoline, and diesel - crude's average daily trading volume in June 2008 is 27% higher than it was in January 2007.[1] This has generated big revenues for ICE, for example, in 2007 the company's exchange fees from trading in Crude Oil futures alone accounted for 15.2% of revenues. [2] The rise in energy prices and the threat of inflation have driven investment banks, hedge funds, and trading firms to hedge, trade, and manage risk through the Intercontinental Exchange.
Increasing government regulation also poses a threat to Intercontinental Exchange. In May 2008, the U.S. Senate approved legislation that strengthens oversight of electronic energy trading platforms such as the Intercontinental Exchange. This legislation gives the Commodity Futures Trading Commission authority to regulate contract trades that have a large volume, are used to help determine prices, or are linked to a regulated contract. [3]
[edit] Business Financials
Intercontinental Exchange became a pioneer in its industry after becoming one of the first fully electronic exchanges. This platform let the company revolutionize trading and seize market share from its largest competitor Nymex Holdings (NMX) . Intercontinental Exchange was formed in 2000 to provide a more efficient, transparent energy marketplace. Since that time Intercontinental Exchange has profited mostly from the fees they charge for customers to use their electronic marketplace. In 2007 ICE offered its shareholders the highest returns among all U.S exchanges for the second consecutive year. with a share price increase of 78% in 2007, following the 197% increase achieved with its market-leading performance during 2006. [5]
Over the Counter:Since the end of 2004, the industry has seen revenue from OTC commodities grow almost fivefold. Intercontinental Exchange’s unique positioning in the over the counter and regulated futures market lets the company use the over the counter market as a testing ground for a new product before releasing the product in the larger futures market. ICE has a history of developing innovative products for the markets it serves, including the development of electronic trade confirmation for the bilateral OTC markets before using similar technology in the regulated futures market.
[6] Almost any product can be traded on the over the counter market and because of Intercontinental Exchange’s limited role in the process, the company faces only a nominal risk in permitting this trade to take place.
In order to discern the market’s demand for a new product or service, Intercontinental Exchange can permit the product to be traded over the counter before releasing the product on the exchange. This system is designed to provide flexibility and it lets Intercontinental Exchange anticipate and respond rapidly to customers and evolving trends in the market.
| ' | ' | NET RPC | ' | ' | ' |
| NYMEX | ICE U.K. | %Diff | ICE U.S. | %Diff | |
| Monthly | |||||
| Dec-06 | $1.16 | $1.33 | 87% | - | - |
| Jan-07 | $1.25 | $1.30 | 96% | $1.53 | 82% |
| Feb-07 | $1.24 | $1.28 | 97% | $1.63 | 76% |
| Mar-07 | $1.22 | $1.31 | 93% | $1.61 | 76% |
| Apr-07 | $1.25 | $1.30 | 96% | $1.72 | 73% |
| May-07 | $1.33 | $1.30 | 102% | $1.68 | 79% |
| Jun-07 | $1.28 | $1.27 | 101% | $2.07 | 62% |
| Jul-07 | $1.24 | $1.30 | 95% | $1.92 | 65% |
| Aug-07 | $1.27 | $1.27 | 100% | $2.03 | 62% |
| Sep-07 | $1.28 | $1.29 | 99% | $2.07 | 62% |
| Oct-07 | $1.28 | $1.28 | 100% | $2.08 | 61% |
| Nov-07 | $1.26 | $1.28 | 99% | $2.08 | 61% |
| Dec-07 | $1.23 | $1.27 | 97% | $2.03 | 61% |
| Jan-08 | $1.25 | $1.27 | 99% | $2.08 | 60% |
| Feb-08 | $1.28 | $1.27 | 101% | $2.16 | 59% |
| Mar-08 | - | $1.25 | - | $2.14 | - |
Buying the New York Board of Trade:On January 12, 2007 Intercontinental Exchange purchased the New York Board of Trade (NYBOT) and the NYBOT became a wholly owned subsidiary of Intercontinental Exchange. [8] In addition to offering cost synergies, this deal permitted Intercontinental Exchange to earn additional revenues from introducing electronic trading to NYBOT’s contracts.
One of the cost synergies that the NYBOT merger provided was that it let Intercontinental Exchange collect revenue by acting as an intermediary and assuming the role of a buyer and a seller for transactions in order to conciliate orders between transacting parties. Before the purchase of NYBOT, Intercontinental Exchange had to perform this service through the LCH.Clearnet, a European clearing house for securities transactions on NYSE Euronext (NYX) and other stock exchanges. Intercontinental Exchange’s customers paid $50 million in 2006 in clearing fees to LCH.Clearnet. [9] Now Intercontinental Exchange can earn this revenue through its use of its own clearing house.
The merger with the NYBOT is not the only step that Ice has taken to limit interaction with a third party clearing house . On May 14, 2008 UK regulators approved the creation of a London based clearing house by ICE. [10] This approval means ICE no longer has to depend on third party clearing houses. By separating itself from third party clearing houses, Ice is positioned to capture $100 million in additional revenue from its new clearing operation. [11]
[edit] Trends and Forces
[edit] Effects of Economic Uncertainty
• The need to hedge price volatility has contributed greatly to growth for various exchanges. This volatility is not a reliable revenue generator in the face of economic uncertainty; however, data does show that the difference is statistically significant between times of economic growth and decline. As prices continue to hit record highs, trading volumes on contracts for everything from crude to gasoline to diesel have followed a similar arc, generating big revenues for exchanges like the New York Mercantile Exchange and the Intercontinental Exchange. [12] Many companies whose revenues are heavily impacted by increases in the price of oil, use exchanges to hedge the impact of rising oil costs to the balance sheet. In addition to this increased trading activity other investors searching for growth have also relied upon commodities to provide a safe haven in times of economic turmoil. Market volatility and the threat of inflation have driven investment banks, hedge funds, and trading firms to hedge, trade, and manage risk through the Intercontinental Exchange .
[edit] Lack of Physical Trading Floor Exposes ICE
Unlike other Exchanges, ICE does not have a physical trading floor. The company disclosed to its shareholders at the end of 2007 the fact that this lack of a physical trading floor exposed the company to various system failures in the event of a power outage [13]
On May 15, 2008 a power outage in Chicago at the company’s primary data center forced Intercontinental Exchange to shut down operations for more than an hour. All futures and OTC markets were closed and all unexecuted active orders were held. [14] Electronic problems of this nature render ICE and its clients helpless because it delays necessary information and trades. The ensuing panic reflects poorly upon ICE because clients with exposure on the Intercontinental Exchange are forced to use another exchange in order to cover. This lack of participant satisfaction with the ICE platform promotes users to trade elsewhere in an already competitive marketplace.
[edit] Mergers and Acquisitions
• Intercontinental will face difficulty as it attempts to adjust to the responsibility of owning a clearing house. Although the merger with NYBOT provided various cost synergy strategies, the operation of managing a clearing house will necessitate a reevaluation of Intercontinental Exchange’s management strategy. This reevaluation is especially merited by increased exposure to defaults. If participants fail to come forward with the cash for their purchases, ICE is effectively left to cover the default via its clearing house. In addition, difficulties in integrating the businesses or any negative impact on the regulatory functions of ICE's subsidiaries will harm the reputation of the company.[15]
[edit] Barriers to Entry
• By offering electronic trading, Intercontinental Exchange has made it much easier for participants to join the marketplace. Lower barriers to entry for derivatives traders will permit more participants to enter the trading market for ICE’s product offerings. The introduction of cleared OTC contracts has reduced bilateral credit risk and the amount of capital participants are required to post on each OTC trade, as well as the resources required to enter into multiple negotiated bilateral settlement agreements to enable trading with other counterparties. [16]
[edit] Government Regulation
Increases in government regulation pose a serious threat to Intercontinental Exchange. In May 2008, the U.S. Senate approved legislation that strengthens oversight of electronic energy trading platforms such as the Intercontinental Exchange. This legislation gives the Commodity Futures Trading Commission authority to regulate contract trades that have a large volume, are used to help determine prices, or are linked to a regulated contract. [17] This increase in government regulation poses a serious threat to Intercontinental Exchange’s business model because it requires OTC participants to operate under increased regulation and incur additional costs. Some of the proposed legislation prevents clearing facilities from being owned or controlled by exchanges.
| Performance (cash values in millions) | ' | 2007 | 2006 | Change |
| Total Revenues | $574 | $314 | 83% | |
| Operating Income | $354 | $205 | 73% | |
| Operating Margin | 62% | 65% | (3) bps | |
| Net Income | $241 | $143 | 68% | |
| Net Margin | 42% | 46% | (4) bps | |
| Basic EPS | $3.49 | $2.54 | 37% | |
| Diluted Eps | $3.39 | $2.40 | 41% | |
| Basic Weighted Avg. Shares Outstanding | 69 | 56.5 | 22% | |
| Diluted Weighted Avg. Shares Outstanding | 71 | 59.6 | 19% | |
| Market Price | $192.50 | 107.9 | 78% | |
[edit] Competition
Other commodities exchanges worldwide that offer energy and primary products include:
| Company | Contracts Traded (millions) |
| Chicago Mercantile Exchange Holdings (CME) | 1300 [18] |
| Intercontinental Exchange | 92.7 [19] |
| London Metal Exchange | 86.9 [20] |
| Nymex Holdings (NMX) | 295 [21] |
| Shanghai Futures Exchange | 58.1 [22] |
| Tokyo Commodity Exchange | 63.7 [23] |
ICE faces significant competition from domestic and foreign exchanges. Following the merger of Chicago Mercantile Exchange Holdings (CME) and Chicago Board of Trade (CBOT) in July 2007, Intercontinental Exchange can only expect competition to intensify in its industry. This threat is especially worrisome for ICE considering the fact that the Chicago Mercantile Exchange already offers a wider range of products. Regional exchanges, exchanges in emerging market countries, and exchanges in producer countries are already beginning to attract enough activity from outside its borders to compete with ICE Futures U.S.’s status as the benchmark pricing market for a given commodity. [24] Even though the Intercontinental Exchange does have an office in Singapore, other exchanges in rapidly developing parts of Asia have a geographical advantage over ICE as they expand their customer base using the electronic platform that ICE created. At the end of May 2008, the Dubai Gold & Commodities Exchange announced that it will start trading West Texas Intermediate and Brent oil futures contracts after receiving approval to offer the contracts to Singapore traders. [25] This is just one of the many emerging competitors that threatens ICE’s position in its competitive industry.
| Company Name | Sales USD (m) | Employees | Net Income USD(m) | Net Profit Margin |
| NYSE Euronext (NYX) | 4,158.00 | 3,083 | 643 | 16.07% [26] |
| Deutsche Boerse AG | 3,708.79 | 3,281 | 1,403.85 | 37.98% [27] |
| Nasdaq Stock Market (NDAQ) | 2,436.59 | 891 | 518.40 | 21.28% [28] |
| Chicago Mercantile Exchange Holdings (CME) | 1,756.10 | 1970 | 658.53 | 37.50% [29] |
| London Stock Exchange | 1,082.60 | 444 | 344.36 | 32.67% [30] |
| Nymex Holdings (NMX) | 673.60 | 400 | 224.04 | 33.26% [31] |
| Intercontinental Exchange | 574.29 | 506 | 240.61 | 41.90% [32] |
| [[ASX Ltd. | 498.98 | 493 | 264.69 | 53.05% [33] |
| Singapore Exchange Limited | 424.35 | 556 | 310.61 | 73.20% [34] |
| Bovespa Holding SA | 292.69 | 837 | 103.33 | 35.31% [35] |
One advantage that the Intercontinental Exchange has over its competitors, is its promotion of the development of a worldwide program to provide enhancements to its energy market data reporting. This arrangement demonstrates ICE’s continued leadership in providing timely, transparent disclosure to U.S. and U.K. market regulators. [36] As a result of ICE’s more enhanced data reporting to the FSA and CFTC, ICE’s WTI contract offers greater transparency to both market participants and regulators than those offered by competing exchanges. ICE’s diverse product offerings and technologically superior platform continues to draw new users who are seeking effective risk management in today’s volatile marketplace.
[edit] References
- ↑ ICE Market Data
- ↑ 2007 ICE 10-k, Item 1(a), pg. 41
- ↑ Bloomberg.com News, "Congress Strengthens Electronic Exchange Oversight," 5/15/2008
- ↑ ICE 2007 10-K, pg.59
- ↑ 2007 ICE 10-K, pg. iv
- ↑ 2007 ICE 10-K, pg. 8
- ↑ Google finance, ICE Income Statement
- ↑ "IntercontinentalExchange and New York Board of Trade Complete Merger"
- ↑ Bloomberg.com News "Intercontinental Exchange Gets U.K. Clearing Approval" 5/13/2008
- ↑ Intercontinental Exchange “UK Regulator Approves ICE Clearing House” May 14, 2008
- ↑ Bloomberg.com News “Intercontinental Exchange getsU.K. Clearing Approval. May 13, 2008
- ↑ The New York Times, "Energy Speculators Draw the Heat," 5/25/2008
- ↑ 2007 ICE 10-k, Item 1(a), pg. 51
- ↑ Financial Times “Power failure forces ICE to halt trading” May 15, 2008
- ↑ 2007 ICE 10-k, Item 1(a), pg. 44
- ↑ 2007 ICE 10-k, pg. 16
- ↑ Bloomberg.com News, "Congress Strengthens Electronic Exchange Oversight," 5/15/2008
- ↑ "December Trading Volume at CME Rises," Yahoo Finance
- ↑ Intercontinental Exchange Press Release Jan. 3, 2007
- ↑ London Metal Exchange Press Release Jan. 5, 2007
- ↑ 2006 NMX 10-k, Item 7, pg. 40
- ↑ New South Wales Department of State and Regional Development
- ↑ New South Wales Department of State and Regional Development
- ↑ 2007 ICE 10-k, pg. 28
- ↑ Bloomberg.com News Dubai Market Offers WTI, Brent Contracts to Singapore Mar 26, 2008
- ↑ 2007 NYX 10-K
- ↑ 2007 DB1Gn.DE 10-K
- ↑ 2007 NDAQ 10-K
- ↑ 2007 CME 10-K
- ↑ 2007 LSE.L 10-F
- ↑ 2007 NMX 10-K
- ↑ 2007 ICE 10-K
- ↑ 2007 ASX.AX 10-F
- ↑ 2007 SGXL.SI 10-F
- ↑ 2007 BOVH3.SA 10-F
- ↑ CNNMoney.com “ICE Facilitates Agreement to Provide Industry's Most Comprehensive Reporting for U.S. Energy Futures Contracts” May, 29 2008
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