Max Bowie: Are Vendor Buys Putting Traditional Exchange Business on ICE?

In the data industry, there’s an old “joke” about consolidation: In the future, the remaining investment bank meets up with the remaining vendor and remaining exchange and the three still argue over issues at the sole remaining industry association forum. Based on recent activity, Intercontinental Exchange sees itself as occupying at least one of those positions.

In the past month, ICE has set aside a fortune to acquire market and reference data provider Interactive Data from private equity owners Silver Lake Partners and Warburg Pincus, and energy trading software provider Trayport from inter-dealer broker BGC Partner’s GFI business. The acquisitions take ICE—which has grown steadily by leveraging acquisitions—into new and unexpected areas for an exchange.

It’s not unexpected that IDC’s backers wanted to divest the vendor after a five-year investment—after all, IDC was ostensibly preparing to go public, and there had been rumors that the company was for sale. But it was unexpected that ICE would pay a premium to take IDC off the market.

After all, ICE had only just divested one of its data businesses—the former NYSE Technologies arm of the New York Stock Exchange, parts of which it sold off, claiming that ICE didn’t want to be in businesses that it didn’t understand—and only recently acquired another in the form of SuperDerivatives, ostensibly to support its clearing operations.

So it seems ICE has doubled down on data. And with around 40 percent of ICE’s revenues now expected to come from the combination of its proprietary data plus IDC’s revenues, “this makes ICE a data company,” says Brad Bailey, research director in Celent’s securities and investments group.

Couple Trayport with 7Ticks and SFTI connecting users and ICE’s exchange and clearing operations, and ICE now owns the energy trading workflow from front to back.

In fact, according to Burton-Taylor International Consulting, the deal makes ICE the industry’s third-largest data vendor, behind Bloomberg and Thomson Reuters. Bailey and Douglas Taylor, founder and managing partner of Burton-Taylor, both highlight IDC’s fixed-income pricing and valuation capabilities as an asset that will help ICE move into over-the-counter marketplaces as the electronification of these markets continues. Among these is energy, one of ICE’s key markets. And that’s where Trayport can expand ICE’s foothold in these markets.

Taylor recently noted that ICE appeared to be trying to diversify its revenue streams, and suggests that “after IDC’s $1 billion in market data revenue is added, you can see how ICE could be moving to service more segments of the industry.”

Certainly, this seems an accurate prediction, since Trayport will give ICE a physical footprint in firms’ front offices. Couple that trading technology with IDC’s 7Ticks infrastructure and ICE subsidiary NYSE’s Secure Financial Transaction Infrastructure (SFTI) network connecting users, and ICE’s exchange and clearing operations, and ICE now owns the energy trading workflow from front to back.

This begs the question of what ICE will do with the rest of IDC. While ICE might simply repackage and sell off any of the IDC business lines that it doesn’t want to create a streamlined version of IDC, Taylor and Bailey both suggest that the exchange might want to retain as much of the IDC footprint as possible to give it a “captive audience” for new data products. “It’s not hard to see new exchange data products generating new revenue from the IDC client base,” Taylor says. 

Not Stupid

ICE’s management team isn’t stupid, and doesn’t waste money on trophy acquisitions: It gets what it wants, gets rid of what it doesn’t, and leverages each acquisition to the fullest to strengthen its core business—its exchange—an approach that now sees it overtake CME Group by revenue, according to figures from Burton-Taylor. That said, with clearing, OTC markets and now even more data distribution capabilities, is ICE’s core business really operating an exchange, or is that just the prerequisite for these other profit centers? And does ICE really want to be in the data vendor and trading tech business, or does it just want control over datasets and delivery mechanisms that it believes will be big revenue-generators for the rest of its business?