Far from being felled by the COVID pandemic – or anything else that has happened in 2020 – the Intercontinental Exchange had its best year in history in revenue and earnings and made its largest acquisition deal ever – which is saying a lot – by buying Ellie Mae two months ago.
“When you look at what’s going on in the world around us, it’s hard to believe we are doing so well,” said ICE’s CEO Jeff Sprecher in an interview at FIA Expo on Wednesday.
The exchange had the foresight to set up a pandemic oversight committee when SARS broke out around 2002 and built a disaster recovery plan for a pandemic, Sprecher said. Before that, its disaster recovery plans had mainly been around cybersecurity.
“We moved everyone away from personal computers onto laptops with docking stations and moved all our tools onto the laptops, including our phone system. We put apps on everyone’s phones so the entire company could communicate using their phones and laptops,” Sprecher said.
At the beginning of the COVID crisis, when people started working from home, productivity went way up, he said. “Everyone had the tools, and they were locked at home with no distractions.”
With the recent opening up of a number of regions, though, productivity has gone back down again. “Opening up means more distractions,” he said.
It’s too soon to tell if ICE will make working from home a permanent fixture or not, Sprecher said, but “we benefit from random interactions in the hallways and from mentoring.”
ICE has hired hundreds of people during the crisis whom no one has met physically. Sprecher said the company’s culture is important, and they have installed a new employee program to talk about that common culture.
Across the company, almost every one of ICE’s business lines has been a winner this past year.
“In the futures space, we’re predominantly physical commodities,” he said. “Those commodities have had all kinds of supply chain disruptions this past year. A lot of people are hedging and speculating around physical commodities. That’s very different from financials, which are largely driven by central bank policy. Central banks have been lowering interest rates and flooding liquidity everywhere. Our peers are highly interest rate sensitive, and they have been impacted. But that is a tiny part of my company, so we haven’t had that impact.”
Sprecher’s interviewer, FIA President Walt Lukken, asked him a question similar to the one he asked CME CEO Terry Duffy on Tuesday about whether crude oil going negative might impact how people view the CME’s WTI contract – and whether they might be more likely to migrate to ICE’s Brent crude oil contract instead. He got a very different answer from Sprecher.
“Brent is really the oil industry’s marker – it’s a commercial contract with the oil industry. WTI has more speculative interest in it,” he said. “Hedge funds and others sometimes come in and leave the trade and only come back in periods of volatility. There are a lot of different actors in the WTI contract. I think some of the technology systems broke down and people didn’t understand the contract. That has resulted in a shift in the industry to people using Brent more and more. More Brent-oriented derivatives are being used – sophisticated hedging tools not necessarily used by retail traders.”
For a while there was no options market on the Brent contract, but then ICE developed one that became very liquid and heavily traded. “We’ve seen a broadening of the market around Brent,” Sprecher added.
Volumes at the New York Stock Exchange, which ICE bought in 2012, “roughly tripled” this year, Sprecher said. He gave credit to his team for ensuring that systems worked “flawlessly with little latency.” He also gave credit to the industry as a whole for all the testing it has been doing, as well as to the regulators for imposing their stress tests.
Two other important recent acquisitions for ICE were MERS (Mortgage Electronic Registration Systems) and Simplifile, a network connecting the agents and jurisdictions underpinning residential mortgage records.
As a result of those acquisitions along with that of Ellie Mae, the mortgage business has become ICE’s fastest-growing segment, although it still accounts for a small part of ICE’s total revenue. According to Sprecher, the acquisitions bring the front end, middle, and back end together at ICE in one common network.
“We didn’t have much of a financial commodity infrastructure, so I saw U.S. mortgages as a way of entering the interest rate complex in a different way,” Sprecher said. The combination on one platform should reduce the time and error rate of mortgages transactions, making them faster and cheaper, he said.
“The error rate has been a big cost to the industry,” he said.
One area in which Sprecher’s answer was similar to Duffy’s from Tuesday was a potential financial transaction tax. He had nothing nice to say about it either.
“When you tax something, you reduce its efficiency. Taxing capital formation will reduce the efficiency of the economy,” he said. “An entire industry in U.S. equities is considering moving their back office infrastructure out of New Jersey [which is currently considering a financial transaction tax]. The entire business is routed through data centers in New Jersey – Wall Street actually exists in New Jersey now,” he said. “But today data centers can be set up and financial transactions consummated anywhere. Lawmakers don’t recognize that our industry is moving into a cloud with no geographic center.”