In
the year 2000, a tiny little upstart energy exchange was born in Atlanta,
Georgia. It began by building an electronic trading system for electricity and
natural gas, something that was a popular idea at the time.
But
it was – perhaps – before its time.
So
the InterContinental Exchange cast its eye over the markets to find something
with a little more liquidity. Maybe something that could benefit from its
technological prowess. ICE spied a very interesting energy exchange on the
other side of the Atlantic and engineered a surprising – to the City of London,
at least - takeover.
When ICE bought the International Petroleum Exchange in
2001, no one in the oil business could imagine life without the IPE floor. The
idea of oil trading on an electronic exchange was considered heresy.
“Impossible,” traders said.
The thought was that since oil is the game of professional
traders, and not mom and pop investors, the floor broker was essential to the
game. Swaggering, hard-drinking and mainly Cockney in origin, the IPE floor
brokers were considered a permanent fixture in the business.
IPE’s own automated trading system had gone through many
technology iterations and was never up to the task, in many traders’ opinions. So,
like a lion stalking the weakest wildebeest, ICE swooped in.
It
transformed the International Petroleum Exchange, second only to the New York
Mercantile Exchange in terms of energy futures trading, seemingly
overnight--from an open outcry “pit” into a sophisticated electronic trading
venue. Cockney brokers out, computers in.
The IPE’s membership and operators should have learned a
lesson from their LIFFE brethren, whose massive open outcry trading floor was
closing down at the time - pit by pit. LIFFE’s main competitor – Deutsche
Borse, had gone electronic with its derivatives trading and was walloping
LIFFE. LIFFE’s state-of-the-art floor closed doors in November 2000, while its
LIFFE Connect electronic trading system went from strength-to-strength.
The LIFFE exchange itself sold to Euronext, eventually
ending up in NYSE’s hands along with the very valuable acquisitions LIFFE had
made along the way. This included the London Commodities Exchange, where softs
such as coffee, sugar and cocoa were – almost exclusively – traded.
But
ICE’s CEO Jeff Sprecher was not daunted by his competition. His dogged
determination to make all things electronic took ICE into clearing in a big
way, adding the capacity for clearing OTC credit default
swaps, and into diversifying its products offerings. ICE’s dominance in
markets from oil to interest rates and credit derivatives prompted NASDAQ in
2011 to choose ICE as its partner in its failed bid for NYSE.
The fact that ICE persevered with its electronic trading
platform, making it ever-faster, offering clearing electronically – is probably
why it had the money and the ability to buy the venerable New York Stock
Exchange and its many acquisitions. I am sure that during the due diligence
process, ICE had a good look at NYSE’s hodge-podge of trading systems and infrastructure.
NYSE members and management had initially resisted the
seismic shift to electronic trading, preferring its image as the bastion of
Wall Street with its colorful floor brokers and trading pits and specialists.
It adopted a hybrid model of automated-cum-open-outcry trading, buying--and
then largely ignoring--state-of-the-art trading systems such as ARCA.
Aggressive all-electronic competitors such as NASDAQ and newcomers including BATS
stomped all over NYSE’s model, gradually eating away at the Big Board’s
once-dominant market share.
ICE was lurking in the underbrush. Sprecher’s strategy of
diversification meant that he needed to further integrate other asset classes,
which – once siloed were now tightly correlated with oil trading. Equities,
interest rates, foreign exchange, and agriculturals such as corn and sugar were
suddenly noticeable as a necessary adjunct to oil futures and swaps trading.
Limping from its market battering by electronic competitors,
NYSE Euronext was the weakest wildebeest.
Since 1792, when it was formed under a buttonwood tree on
Wall Street, the New York Stock Exchange has captured the imaginations of
people around the world. It has attracted some of the best and brightest young
people to work on Wall Street, conjuring up an image of stolidity and grace.
Now, although the NYSE brand will remain, ICE will become
the top dog. New York City must be stunned that it has lost its bulwark stock
exchange to a jumped-up little technology upstart from Atlanta.
