Another 'Moat' Investing Example

Nov. 14, 2019 7:24 AM ETCME, ICE, NDAQ4 Comments


  • NFX is another example of a failed attempt to "breach the castle".
  • Both CME & ICE have a massive "moat around their (energy) franchises".
  • Nasdaq recognizes a mistake 4 years too late.

On November 13th, 2019, buried deep in the WSJ, was an article that merited more time and analysis. With much fanfare, in 2015, Nasdaq launched its energy futures exchange called NFX. This was supported by Nasdaq CEO Bob Greifeld and was a full attack on the dominant energy exchanges of CME Group (NASDAQ:CME) and Intercontinental Exchange (NYSE:ICE). In fact, Greifeld stated that these two exchanges were running a "monopolistic environment" for trading energy contracts and he was looking to cut trading fees by 50%.

CME dominates the trading of WTI Crude, while ICE is the defacto Brent Crude exchange. The simple logic went that traders would migrate to lower cost environments, if only other exchanges made the futures contracts available. This misses the bigger picture for traders. Yes, they don't love high fees, but trading costs are only one component they focus on. For traders, liquidity is much more important. Tight bid/ask spreads, coupled with plenty of liquidity is what draws traders to an exchange, not lowered fees.

At the time of NFX's creation, both these stocks (CME & ICE) were weak, with heightened competition and the threat of an intense competitive landscape. This was not the 1st attack on these dominant exchanges. Every few years, an international exchange or US start-up exchange attempts to steal market share, with the brilliant idea of simply cutting trading costs. Each and every time, these new entrants fail, because tradings costs are not nearly as important as liquidity / volumes.

Every time a new entrant arrives at the exchange castle (i.e. the proverbial "gate", to continue the metaphor), the incumbent exchanges see their stock prices fall. It only impacts them for a short while, but it negatively impacts sentiment and creates uncertainty. As we continuously say, "stocks hate uncertainty" and both exchanges were under pressure from a well-capitalized and publicly traded Nasdaq (NASDAQ:

This article was written by

Manole Capital Management is a boutique asset manager, based in Tampa, Florida. Launched in 2015, Manole Capital exclusively focuses on the emerging FINTECH industry. Warren joined Goldman Sachs Asset Management in 1994, following graduation from Lehigh University. On GSAM's Growth Equity team, Warren was a portfolio manager on various '40 Act mutual funds, as well as having primary responsibility for certain companies in the financial and technology sectors. After nearly 20 years at GSAM, Warren left and joined Logan Circle Partners in 2013. Leveraging his accounting background from Lehigh University, Warren received his Certified Public Accountant license in 1998. In 2004, Warren received the Chartered Financial Analyst designation.

Disclosure: I am/we are long CME, ICE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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