IntercontinentalExchange (ICE) was featured as Barron's cover story this weekend in an extremely positive three page article detailing three big trends driving securities trading. The first is the shift from manual to electronic systems, which made trading faster and cheaper, swelling volume. Globalization is a second factor, and now there's the migration of analog products (credit default swaps) that trade over the telephone onto listed, transparent markets like exchanges.
ICE merged with a clearing business owned by big Street firms, including Bank of America (BAC), Credit Suisse (CS), Deutsche Bank (DB), Goldman (GS) and JPMorgan (JPM). While competing platforms may well co-exist, Street firms are likely to steer customer orders to the destination in which they have a vested interest: ICE.
Investors may be valuing ICE on its old commodities footprint, while overlooking its push into broader asset classes and to self-clearing, notes Morgan Stanley analyst Patrick Pinschmidt. He described ICE as "a growth exchange without the multiple."
Analysts caution about a forthcoming decline in trading volumes, though the anxiously-awaited slump has yet to arrive: U.S. stock-trading volume is up 54% this year, including a 47% year-over-year rise in November, although weaknesses are emerging, like November's 21% ebb in options volume. Fixating on volume detracts from a more apt emphasis on profit. "I run the exchange for EPS growth, and not necessarily volume growth," says ICE CEO Jeffrey Sprecher. For example, ICE just clinched an exclusive pact to list popular Russell Index futures, and analysts estimate that each 25,000 increment in daily volume will boost per-share earnings by three cents.
Disclosure: Author holds a long position in ICE