There are many stock exchanges on the planet. Some are well established, some are nationalised, and some have incredibly low trading volumes (for example, the Mongolian Stock Exchange). But how does the business behind a stock exchange operate, and how can retail investors value the companies that own these exchanges?
Let’s look at the most relevant case study: Intercontinental Exchange Inc (Ticker: ICE). Once a tiny start-up out of Atlanta and now a Fortune 500 member, I think any aspiring investor should understand the inner workings of the company that owns the very infrastructure they use to place trades. ICE generates revenue in the following ways:
- Listing companies on their exchanges, including upfront and annually recurring fees, along with corporate action fees, including stock splits and IPOs. ICE owns 2 of the top 10 exchanges by market cap in the world, the NYSE (New York Stock Exchange) and Euronext, and all relevant subsidiaries.
- Transaction and clearing fees on their exchanges. These vary but are usually all under 1/10th of a single cent, as shown on the ICE website. When you consider there is monthly trade volume on the NYSE of 1,452 trillion dollars, this begins to make sense.
- Data Services from their exchanges (27% of total revenue in 2021).
- Providing Mortgage Infrastructure: Residential mortgage markets are in the trillions of dollars in the US, providing another consistent income stream. However, this is harder to examine and acts as a minority revenue stream (18% of total revenue in 2021).
Exchange fees make up 55% of their income and largely control their overall investor sentiment.
But fundamentally, ICE’s performance is dependent on the rise or fall of global trading volumes, as 74% of the S&P 500 and 83% of the Dow are listed on the NYSE. This means that ICE idly makes money as world markets function and trades are executed.
Further revenue streams include expansion to other markets through mergers and acquisitions. In the past 5 years, ICE have acquired 12 companies that support their existing revenue streams and are looking at acquiring more, most interestingly the LSE Group (London Stock Exchange Group).
As for the company value, let’s take a look at an example. One year after the 2008 financial crisis, total trading volume had fallen by 27% in the US and by over 50% in the EU. This decline caused ICE’s share price to drastically fall from its highest point by about 66%, worse than the S&P 500 index’s loss of around 48%. A beta value of 0.9 with the S&P 500 suggests this correlation is ongoing but becoming less volatile (1 being a perfect market correlation).
To conclude, the ICE is a slow and steady infrastructure giant that generates revenue in many ways and value is closely aligned to how well the markets are doing. Investors should consider any potential acquisitions, and all variables that affect global trading volume.
Analyst: Oliver Bonallack
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