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“We tend to be people that don’t really design contracts at ICE. We tend to react to what customers are telling us they need” Jeff Sprecher, ICE |
“Great. Just what the market needs. Another trading platform,” was the cynical response from one market participant when he heard that Intercontinental Exchange (ICE) will list new variants on its existing currency futures on November 6. Given that the announcement coincided with initial reports that FXMarketSpace (FXMS), the joint venture formed by the CME and Thomson Reuters, was about to close, his cynicism, at least at first glance, appears more than justified. After all, ICE does not appear to be offering anything that is not already available. Super-fast trading platform? There are dozens of them already. A clearing house to mitigate credit risk? The CME already provides that and FXMS tried to extend the concept and failed. Larger-denominated contracts than the CME to bring it in line with the over the counter market? Eurex US tried that and failed.
However, ICE is one of the undoubted success stories of recent financial history and if you analyse what has made it successful, it is not new contracts but catering for client demand for efficiency. Formed by Jeff Sprecher, chairman and chief executive, a former power plant developer, as recently as May 2000, Atlanta-based ICE has captured a vast share of the exchange-traded and OTC energy markets.
Shrewd acquisition
A shrewd acquisition programme has undoubtedly been behind much of its success – the exchange managed to buy the International Petroleum Exchange for a bargain basement £130 million ($213 million) in 2001. But perhaps as important has been ICE’s early acceptance, especially in the US, that many financial markets would go electronic. This helped it to grow faster than many other exchanges, which were perhaps even unaware that a new rival was in their midst.
During its short life, ICE has shown that it is more than happy to target other exchange’s markets. For instance, as the New York Mercantile Exchange, its rival in energy trading, clung stubbornly to open outcry trading, ICE simply listed a West Texas Intermediate oil contract on its screens. It nearly walked off with the whole market, until Nymex finally realized it had to respond and go electronic as well. ICE has retained a healthy 25% to 30% share of WTI trading.
Of course, FX is different to these somewhat arcane markets. It has long embraced electronic trading and as well as the numerous OTC platforms on offer, there is also the CME, which is a major player in the market. So it appears that ICE is not going to offer anything that does not exist already.
Wherefore success?
Sprecher appears completely unfazed by this appraisal. And he is able to rightly point out that ICE already offers successful, albeit niche FX products. When it took over the New York Board of Trade, it inherited a suite of FX contracts, including the famous dollar index. “I’m an engineer, so I try to break things down so I can process them and understand them,” says Sprecher. “When we bought Nybot it was basically doing open outcry trading of foreign exchange at a moment in time when the market was incredibly electronic. And we were looking at it and trying to figure out why that was successful,” he adds.
“The answer is that it wasn’t necessarily people who were making an argument of electronic trading versus open outcry, but that it was actually people trying to get access to our futures-style clearing house, and the only access Nybot offered was through open outcry trading. So we thought if we make it easier by using our electronic distribution capabilities, we should be able to grow that business,” he says.
Sprecher believes that there will be a growing demand for exchange-traded FX products and that there is room for more than just the CME. He says he has also considered entering the OTC market – not surprising given that ICE pioneered the clearing of OTC energy products – but he is not quite so sure that the demand exists, yet, to do the same in FX. “We feel that one of the things we bring to the market is the fact that we have a futures-style regulated clearing house,” he says. The easiest way for us to enter the business is to do it through a futures contract. The real value if we ever entered the cash market would be cash clearing. There are plenty of very good cash execution facilities. We ourselves have a very good platform but that would not be a new feature we were bringing to the market. Trading alone would not be a new feature. The real asset would be the clearing house.
Trade volatility
“There are people in the market who simply want to trade volatility that exists in currencies. They have no interest in receiving the currency. But they want to potentially hold the volatility over time. It makes sense that a futures-style clearing regime could work because in futures we have limited duration contracts that can be easily rolled forward.”
He says ICE’s decision to make a push into FX has come purely from customer interest, which has increased as the exchange has moved away from its energy roots. “We tend to be people that don’t really design contracts at ICE. We tend to react to what customers are telling us they need. I’ve been in customer meetings where people have asked us about the FX space. We have modest expectation that we’ll be able to come out immediately with tight liquid markets.”
The dollar index might well serve as the bait to hook a decent share of the market. “The dollar index is an easy way for people to buy exposure of where they think the dollar is going to move against the rest of the world,” says Sprecher. “There is a market for that. It’s been a nice contract for us.” Will it become even nicer? Time will tell.
