What we think about Intercontinental Exchange (ICE)
Intercontinental Exchange in Three Words: Networks, Exchanges, Mortgages
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Background
Intercontinental Exchange (ICE) is a provider of marketplace infrastructure, data services and technology solutions to a broad range of customers including financial institutions, corporations and government entities. The most popular and recognizable of these, at least to most investors, is its ownership of the iconic New York Stock Exchange. (It should come as no surprise that its shares are traded on the NYSE).
Its marketplace infrastructure, data services, and technology solutions span many asset classes, including equities, futures, fixed-income vehicles, and U.S. residential mortgages. Management does not think of its properties as a collection of exchanges and clearances — as does most of the financial world — but as a collection of digital networks where every incremental buyer and seller adds value to the overall network. ICE’s revenue in the third quarter 0f 2023 was a cool $2 billion, a 9% constant currency increase that’s closer to 4% when excluding growth from acquisitions.
ICE enjoys several different economic moats around other areas of its business, but none are more robust than the network effects of some of its exchanges. More buyers and sellers lead to deeper liquidity, lower transaction costs, and better price discoverability, leading to more buyers and sellers. This is especially true for ICE’s futures business, whose contracts cannot be bought or sold on another exchange, essentially holding the contracts captive on its platform and forcing buyers and sellers to ICE’s exchanges.
Owning and operating exchanges also give ICE access to exclusive and valuable data to sell to asset managers and financial institutions as subscriptions. This data is indispensable to money managers and comes with pricing power and high retention rates.
ICE’s services come with high switching costs, an often-overlooked economic moat. For instance, realtors using Ellie Mae’s mortgage origination software would think twice before switching to a competing solution, as it would require training employees on a new platform. This time-consuming ordeal could disrupt business during the transition process. It is rare for companies listed on the NYSE to switch to a competing exchange, such as the Nasdaq. There is little benefit, and it is a costly process. The proprietary data it sells to investors is valuable and would be difficult for clients to find through other channels.
Intercontinental is a business that benefits from scale; spreading its fixed costs across a vast number of transactions and variable revenue streams. Its CEO Jeffrey Sprecher is one of the financial industry’s best dealmakers, leading it through more than 30 successful acquisitions that have included Black Knight (2022), Ellie Mae (2020), and the Mortgage Electronic Registrations Systems (“MERS”; 2018).
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