Investing in Stock Exchanges: a novel idea

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The world of investing centres on investing in stocks. However, Jon Markman writing at Forbes offers up a new idea: investing in stock exchanges. How does that work, you may ask. Markman points to the Intercontinental Exchange (ICE), an operator of commodity and stock exchange, which posted exemplary financial results on 1st August and suggests that as its managers plan to disrupt lucrative markets, such as the new digital ones, it is worth looking at it as a potential investment.

ICE “builds, operates and advances global markets through information, technology and expertise,” according to its website. It’s a relatively new set-up that was only founded in 2000. In 1996, Jeffrey Sprecher, a mechanical engineer from Wisconsin, bought Continental Power Exchange, an Atlanta electronic energy trading company for $1,000. He saw an opportunity to take advantage of a move to electronic trading.

The company launched as ICE in 2000 when Sprecher gave up 80% of the business to investment bankers Goldman Sachs and Morgan Stanley, according. It immediately became a competitor to Enron, one of the biggest electronic trading platforms at the time. However, it wasn’t long before the Enron scandal broke and in a very short time ICE became the market leader.

Sprecher had no experience in financial markets, nor had he ever traded stocks and shares, but he “could see how slow, traditional financial markets were about to be disrupted by fast, low-latency software platforms,” Markman says. Sprecher recounted the story of how flying back from London he spotted a story in the Financial Time about credit default swaps (CDS), and while he had no clue about what they were, he intuited that there might be an opportunity for ICE to leverage its platform to build an electronic marketplace. Today,  ICE currently clears 96% of all CDS.

He also used his creative thinking to engineer the $8.2 billion buyout of the New York Stock Exchange in 2012. In a little over a decade, this small Atlanta company went from obscurity to being in the vanguard of financial markets.  Today ICE currently operates 12 regulated exchanges and six clearing houses. The company logged $6.3 billion in revenue in 2018.

Its success is down to a great strategy based on seeing the transformation of financial markets early on. It has continued to make interesting strategic acquisitions, including the Chicago Stock Exchange last year, and as Markman says, “Getting ahead of the digital transformation of the $11 trillion mortgage market is another multibillion-dollar opportunity for ICE.”

Furthermore, as it is based in regulated financial markets, the company is the logical intermediary for this emergent digital ecosystem. It appears ot be firing on all cylinders, and as Markman says, “Growth investors should consider using broad-market weakness to accumulate shares.”

 

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