Intercontinental Exchange: Powering Global Trade
Intercontinental Exchange: Powering Global Trade
A deep dive into the business behind the New York Stock Exchange
Dear reader,
Welcome back to another deep dive into a wonderful company.
Today, we’re taking a closer look at Intercontinental Exchange (ICE), a leading provider of technology and data solutions across the financial industry. ICE's diverse range of products spans major asset classes, including futures, equities, fixed income, and U.S. residential mortgages. The company offers its customers mission-critical tools designed to enhance transparency and improve workflow efficiency across these markets. ICE owns the New York Stock Exchange, along with twelve other exchanges and six clearinghouses. Its portfolio extends to data and analytics technology, mortgage solutions, and much more.
In this article, we’ll break down what exactly ICE does, how the company’s been performing, and what the future might hold. From there, we’ll assess whether ICE could be a good investment opportunity.
1. History
Jeffrey Sprecher, born in 1955 in Madison, Wisconsin, founded ICE in 2000 after spending much of his career in the energy exchange business. His first job was at the industrial company Trane, where he met entrepreneur William Prentice. Prentice was developing power plants in the wake of U.S. electricity market deregulation, which allowed private companies to enter the energy sector. Impressed by Sprecher, Prentice offered him a position at his new venture, Western Power Group, in 1983. While Prentice eventually left the company, Sprecher remained until 1996, when another wave of electricity deregulation hit the market.
Sprecher's entrepreneurial drive led him to identify a growing opportunity in electronic trading. In 1997, he acquired Continental Power Exchange, which provided an electronic platform for power plant owners to buy and sell surplus electricity—like an eBay for energy products. Prior to this, trading energy products was slow and cumbersome, requiring owners to negotiate prices by phone.
Over the next three years, Sprecher worked on expanding the exchange network by signing up utility companies, one of which was Enron. Enron soon launched its own electricity trading platform and came to dominate the industry, but collapsed in 2001 amid an infamous accounting scandal. While the Enron scandal was a disaster for its employees, it hugely benefited Sprecher and his company.
By the time Enron went bankrupt, ICE had already been established. Traders of energy products, including major banks like Morgan Stanley and Goldman Sachs, were looking for alternatives to Enron. They were dissatisfied with Enron's platform because it wasn’t a place for buyers and sellers to meet, but a place where Enron bought from every seller and sold to every buyer itself. ICE was formed from the foundation of Continental Power Exchange, with backing from Goldman Sachs and Morgan Stanley, who passed portions of their stakes to major power companies like BP, Total, and Shell, as well as financial institutions like Deutsche Bank and Société Générale.
ICE began as an energy commodity exchange, bringing greater price transparency, efficiency, liquidity, and lower costs. It soon expanded beyond energy to include soft commodities, foreign exchange, and equity index futures, primarily through strategic acquisitions. The first major acquisition occurred in 2001 when ICE acquired the International Petroleum Exchange, Europe's leading energy futures exchange at the time.
ICE went public in 2005 on the New York Stock Exchange (NYSE)—which it didn’t own yet. The company continued its growth strategy by acquiring the New York Board of Trade (NYBOT) in 2007, adding physical commodities like cocoa, coffee, cotton, and sugar to its trading platforms.
The largest acquisition at the time came in 2013 when ICE purchased NYSE Euronext for approximately $8 billion, significantly expanding its influence in global finance. The company went on to divest all Euronext assets, keeping only the NYSE. Today, Euronext is a European competitor of ICE.
In recent years, ICE has ventured into mortgage solutions, acquiring companies like Ellie Mae in 2020 and Black Knight in 2023 to diversify its offerings further.
ICE has evolved from a niche electronic energy exchange startup into a global financial powerhouse worth almost $100 billion through strategic acquisitions and expansion into new markets.
2. How ICE Makes Money
Today, ICE is more than just an energy products trading platform; it provides a wide range of products and services across the entire financial industry. As such, the company reports its results in three business segments, which we’ll explore:
Exchanges: ICE operates regulated marketplace exchanges for the listing, trading, and clearing of various derivatives and financial securities, also offering data and connectivity services related to those venues. Managing 13 regulated exchanges and six clearing houses globally, ICE enables trading in asset classes such as energy, agricultural and metals, financial futures and options, stocks, and equity options. Notably, over 70% of S&P 500 companies are listed on the NYSE, which ICE owns, and approximately $6.1 trillion in ETF assets under management are listed there.
ICE’s data and connectivity services encompass real-time and historical pricing data, order book and transaction information, and other connectivity services tied to its futures, equity, and options exchanges, as well as its clearing houses.
Through its “Exchanges” segment, ICE generates revenue via transaction fees and recurring data and listing fees. Each time a trade is executed on its platforms, ICE charges a fee. Companies listed on ICE-owned exchanges pay an annual listing fee, while the company also earns clearing fees from its clearing houses and primarily recurring fees from its data and connectivity services.
In 2023, this segment generated $4.4 billion in net revenue (56% of total net revenue) and $3.2 billion in operating income (86% of total operating income). Clearly, ICE's exchanges and clearing houses are its core assets.
Fixed Income and Data Services: ICE also offers products and services related to fixed income securities, such as bonds and loans. Through ICE Bonds, traders have access to different trading methods, including click-to-trade, request-for-quotation, and auctions, to trade fixed income securities. Other services include CDS Clearing, a clearing service for credit default swaps, pricing and reference data for fixed income securities, and the ICE Global Network, which provides secure, low-latency access to trading venues and data sources.
Revenue for this segment comes from trading and clearing fees, interest on CDS Clearing margin deposits, and subscription fees for data and connectivity services.
In 2023, the segment generated $2.2 billion in net revenue (28% of total net revenue) and $811 million in operating income (22% of total operating income).
Mortgage Technology: ICE provides a technology platform with workflow tools designed to address inefficiencies and reduce risks within the U.S. residential mortgage market. Its origination technology serves as a central system of record for mortgage transactions, automating data gathering, review, and verification. ICE also offers digital closing solutions that streamline the closing and recording of mortgages, along with servicing software that manages tasks such as loan boarding, final payment, and bankruptcy processing. Its data and analytics tools enable lenders and stakeholders to make informed, data-driven decisions, assess risks, and enhance customer retention. Overall, ICE’s mortgage technology solutions drive efficiency and support data-informed decisions by digitizing and automating key processes throughout the mortgage lifecycle.
This segment generates revenue primarily through subscriptions for its origination technology and data and analytics, and transaction-based revenue from its closing solutions.
In 2023, Mortgage Technology generated $1.3 billion in net revenue (16% of total net revenue) and an operating income of -$276 million (-7% of total operating income). Importantly, this segment has been profitable in previous years.
ICE’s revenue is largely recurring and transaction-based, providing consistency and predictability. In 2023, 52% of revenue was recurring, with the rest transcation-based. Below an overview of the company’s revenue mix, taken from ICE’s 2023 annual report.
ICE generates most of its revenue via energy futures and options and cash equities and equity options, while fixed income data and analytics and data and connectivity services are two other important segments. However, transaction-based expenses are deducted from ICE’s “Exchanges” revenue, primarily due to costs associated with the equities and equity options segment, making this segment less significant than it might appear at first glance. Transaction-based expenses include fees paid to the SEC, liquidity payments to cash and options trading customers, and routing charges to other exchanges when ICE lacks the best bid or offer for a customer trade. The image below provides a more accurate revenue mix for the “Exchanges” segment.
Although ICE’s cash equities and equity options generate less net revenue than expected, its exchanges, including the NYSE, remain highly valuable. These exchanges not only bring in trading fees but also generate significant revenue from listing fees and data and connectivity services.
3. ICE’s Moat
ICE's competitive moat primarily consists of intangible assets and network effects, with switching costs and cost advantages also contributing.
The NYSE is one of the most recognized stock exchanges globally, making it a desirable listing venue for companies seeking enhanced visibility and credibility. Approximately 70% of S&P 500 companies are listed on the NYSE, underscoring its brand power, which helps generate revenue from trading, listings, and data services. In addition to its strong NYSE brand, ICE offers proprietary data services vital for customers requiring reliable pricing and analytics for decision-making. This wide array of data includes pricing and volume data for various asset classes, clearing and settlement data, analytics and valuation data for fixed-income securities, as well as corporate and mortgage data.
Network effects are particularly strong in ICE’s futures exchanges. As the number of traders on ICE's platform increases, the platform becomes more valuable to all participants. This growth in trader numbers enhances liquidity, leading to faster trade execution and narrower bid-ask spreads, ultimately reducing costs. The network effect is strongest in ICE's futures exchanges, as contracts traded on the platform must also be settled there. In contrast, equities traded on the NYSE can be sold on other exchanges, meaning liquidity pools are not held captive within the NYSE, which diminishes the potential benefits of faster trades and lower costs. Nonetheless, the NYSE still enjoys considerable trader activity due to its established size and reputation, which further bolsters the company’s competitive advantage.
Switching costs are also significant across ICE’s services. In its futures exchanges, ICE’s large liquidity pools discourage switching, as moving to a platform with fewer traders typically leads to slower execution and wider spreads. Additionally, futures contracts opened on ICE cannot be transferred mid-trade to another platform. ICE’s data services present switching costs as well, as many clients integrate ICE’s data and analytics into their workflows and trading algorithms. Switching would require considerable effort to adjust these systems. The NYSE brand also imposes switching costs: listed companies that move to lesser-known exchanges could risk a loss of visibility and trading volume.
Lastly, ICE benefits from cost advantages rooted in economies of scale and vertical integration. Much of its business is highly scalable, particularly its exchanges, where fixed costs per transaction decrease as volumes grow. ICE’s vertical integration through its clearinghouses and exchanges also reduces clearing and settlement costs, eliminating the need for third-party services.
4. Key Financials
ICE’s historic revenue growth has been impressive, with a compound annual growth rate of nearly 12% since 2014.
A breakdown of ICE’s revenue highlights the importance of its “Exchanges” segment, which not only leads in revenue size but is also showing robust growth. Although ICE’s mortgage segment has grown faster, this was from a smaller base and largely driven by acquisitions.
Operating income per segment shows a similar pattern. The “Exchanges” segment generates the most income by far. The segment has the highest operating margin at 72%, while “Fixed Income & Data Services” carries a 36% operating margin and “Mortgage Technology” -17%, underscoring that ICE’s moat strength primarily stems from its exchanges.
ICE is consistently profitable, with overall operating margins around 50%. Recently, margins have dipped slightly below 50%, likely due to the mortgage segment’s current unprofitability. The compound annual growth rate for net income is close to 10%, with free cash flow growing even faster.
Notably, free cash flow regularly exceeds net income, largely due to high amortization and limited capital expenditures. As an acquisition-driven company, it’s helpful to subtract acquisition costs when assessing free cash flow. This adjustment shows that while ICE has positive cash flow in many years, large acquisitions create heavy fluctuations.
As an investor, I would prefer to see consistent and reliable free cash flow, but fluctuations like these should be expected with acquisition-driven companies.
ICE’s Return on Invested Capital (ROIC) leaves a bit to be desired. On one hand, investors may exclude goodwill from total invested capital, considering the company’s acquisitive nature, but on the other hand, this goodwill is real capital management has allocated. By excluding goodwill, one thing becomes clear: ICE heavily relies on acquisitions.
I believe the company’s relatively low ROIC is a result of heavy acquisitions in recent years in areas where ICE’s competitive advantage is weakest. For example, in purchasing Ellie Mae and Black Knight, two mortgage technology focused companies, ICE expanded this segment of its business, but that’s clearly the weakest area of the business today. This idea is reflected in the company’s growth of goodwill the past decade, which has outpaced profit growth.
ICE’s balance sheet shows $2.6 billion in cash against $22.1 billion in total debt, leaving a net debt of $19.5 billion. This results in a net debt-to-free cash flow ratio slightly over 5, implying it would take around five years to clear all debt with current cash flows—higher than my preference for under 3. Additionally, ICE’s interest coverage ratio of 4.6, while sufficient, could be improved to minimize financial strain. Overall, I believe ICE’s balance sheet is average at best.
5. Management
ICE’s founder and CEO, Jeffrey Sprecher, has transformed the company from an energy trading platform into a diversified financial leader. Sprecher, a pioneer in electronic trading, remains actively involved, with a significant personal stake in ICE.
Sprecher holds 4,894,852 shares of ICE, worth about $792 million as of this writing. When taking his 2023 compensation of $28 million into consideration, it’s clear that Sprecher holds a relatively large stake in the company. His interests are aligned with those of shareholders.
As discussed earlier, a large part of ICE’s capital allocation strategy is focused on acquisitions. Especially in recent years, these have suppressed the company’s returns on capital. The latest two major acquisitions, both in the mortgage segment, cost the company significant capital, while the mortgage technology segment is still unprofitable and lacks a proven moat. While it’s not a problem the segment is still unprofitable—one might even say it’s logical shortly after major acquisitions—the company’s strength mostly depends on its exchanges and clearinghouses, not its mortgage offerings. I would be okay with an acquisition-driven capital allocation strategy if returns on capital can be sustained, but that doesn’t seem to be the case with ICE unfortunately. The company also pays out a consistent dividend and buys back shares whenever no major acquisitions are in sight.
6. Risks
ICE faces multiple risks, some bigger than others. These are some of the biggest risks:
ICE’s ROIC including goodwill is too low. Based on this metric, the company doesn’t invest its capital efficiently. Growth against low returns on capital is value destructive, making this a significant risk when investing in ICE.
An acquisition-heavy growth strategy is risky as overpaying for companies can happen, and because acquired companies may fail to deliver what management had hoped for—the company may be weaker than expected, synergies might be less significant, etc.
Companies like ICE will always face regulatory and geopolitical pressures. Entities like the SEC and governments have the power to hinder ICE’s business, by capping fees or introducing sanctions. It’s an external risk, yet meaningful.
7. Conclusion
ICE has demonstrated itself as a high-quality business with a solid track record of growth and profitability since its founding in 2000. The company has built a portfolio of strong assets, including its highly profitable futures exchanges and the NYSE, one of the world’s most iconic stock exchanges. With a diversified revenue base and numerous competitive advantages, ICE’s growth potential remains impressive. Founder Jeffrey Sprecher continues to lead the company actively, a reassuring sign for investors.
However, not everything is great. The company’s acquisition-heavy strategy has suppressed returns on capital, possibly meaning that ICE has been overpaying to acquire companies. Growth is good, but only against sufficiently high returns on capital.
Therefore, I will not be buying ICE until signs of improving ROIC show. We’ll have to wait and see if the company’s recent expensive acquisition will generate meaningful returns, but considering the mortgage segment is by far the weakest segment, I have doubts. Then again, Sprecher has proven himself to be an excellent leader, and I’m sure he knows what he’s doing. Still, I’ll be waiting for stronger fundamentals before taking the leap.
Disclaimer: the information provided is for informational purposes only and should not be considered as financial advice. I am not a financial advisor, and nothing on this platform should be construed as personalized financial advice. All investment decisions should be made based on your own research.