What it means
ICE began as an electronic marketplace for trading energy products, in an industry where deals were mostly done by phone. It grew by offering screen-based trading that was open to many participants and cheaper to access.
Over time it added agricultural, financial and credit products. Its expansion came through acquisitions.
In 2001 it bought the International Petroleum Exchange in London, which became the home of Brent crude oil futures, a global price benchmark for oil. In 2013 it completed the purchase of NYSE Euronext, which brought the New York Stock Exchange and several European exchanges into the group.
The business has three broad parts. Exchanges list products and match buyers with sellers, clearing houses stand between the two sides of every trade to guarantee that it is completed, and data and technology services sell prices, analytics and software.
The clearing function is important because it removes the risk that one party defaults on the other. For finance professionals the group matters for several reasons.
Many benchmark prices used in contracts, loans and risk management come from its markets. Companies that hedge fuel costs or interest rates may well trade or clear contracts through its venues without realising it.
As a listed company itself, ICE earns revenue from transaction fees, clearing fees, data subscriptions and listing fees. Its income depends on trading volumes and on the number of contracts held, so periods of market volatility often raise trading activity and revenue.
Analysts therefore follow its monthly volume statistics closely, as a quick guide to how its earnings are likely to move. A nuance is that the name changed.
The earlier form, written as one word, IntercontinentalExchange, was replaced by Intercontinental Exchange when the group reorganised around the time of the NYSE deal, and older documents use the earlier form.
In practice
Real-world examples.
Example
An airline wants to protect itself against rising jet fuel costs. Its treasury team buys oil-related futures on an ICE market, and the clearing house guarantees the other side of the trade. The airline also compares the exchange price with its supplier contracts, so it knows how closely the hedge matches its real fuel bill.
Example
A company decides to list its shares on the New York Stock Exchange, which is part of the ICE group. The finance director pays listing fees and gains access to a large pool of investors.
Example
A bank buys market data from ICE to value its trading positions each day. The data feeds into the bank's risk systems and its reports to regulators.
Case study
Seen in the real world.
Marlborough Fuels is an illustrative, fictional distributor that buys diesel for resale to trucking companies. Its finance director worried about sudden price jumps that could erase a quarter's profit.
She arranged a hedge by buying oil futures traded on an exchange operated by a large exchange group. Each contract covered a fixed quantity, and when she bought 20 contracts of 1,000 barrels at $85, the position covered 20 x 1,000 = 20,000 barrels.
When prices rose by $5 per barrel, the physical purchases cost an extra 20,000 x 5 = $100,000, but the long futures position gained a matching amount. In this illustrative story, the clearing house paid out the gain automatically each day, which is why the finance director valued its guarantee as much as the hedge itself. The distributor could therefore keep its delivery prices to trucking customers steady, which strengthened its relationships when competitors were passing on sudden increases. The finance director also noted that the exchange's rules required her to post margin, which is a deposit held against possible losses, so she kept extra cash available to meet daily calls. She explained to the board that the hedge reduced the uncertainty in the budget but did not guarantee the cheapest possible fuel price. The director later added that she read the exchange's contract specifications carefully, because details such as contract size and delivery month decide how well a hedge fits the real exposure.
Watch out
Common mistakes.
- Thinking of ICE as a single trading floor, when it runs many exchanges and clearing houses across several countries.
- Assuming an exchange and a clearing house are the same thing, when the exchange matches trades and the clearing house guarantees them.
- Using the old one-word name as if it were a different company, when it refers to the same group before the rename.
Questions
People also ask.
What does ICE do?
It operates exchanges, clearing houses and data services for trading energy, commodities, financial products and shares.
Does ICE own the New York Stock Exchange?
Yes, it acquired NYSE Euronext in 2013 and the New York Stock Exchange became part of the group.
Why do businesses care about ICE prices?
Many contracts, loans and hedges use ICE benchmark prices, such as Brent crude futures, as their reference.
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