Intercontinental Exchange, Inc. (ICE) Earnings Call Transcript & Summary

Okay. Welcome back. And I'll repeat it, the 20th Annual Global Exchange and Fintech Conference. We're getting to some of the mainstays of the conference, that have been here since the beginning. So it's my pleasure to introduce the Chairman and CEO of ICE, the Intercontinental Exchange. Jeff started -- I don't have the name in -- I know what went public in 2000...

'05.

'05. But the -- what was the...

Continental Power Exchange.

The Continental Power Exchange.

And then I decided it should be intercontinental and it shouldn't be limited to power. And that's how the name came.

And voila. Jeff, thank you for participating all these years. And I would say what has been an experience is, we had a running joke that Jeff would lay bread crumbs of his ideas of where some of the strategies were going, whether it be about clearing, whether it be about taking data and algorithms and perfecting the exchange model into new places like mortgage. But anyway, it's been a great watching you innovate.

So I guess first question would be, as you look at the global economy, because ICE has significant assets, both in Europe and U.S. and does business beyond that, as well with -- especially with the crude oil center. So when you look at the global economy, what are you seeing? You're more focused on what happens in Europe, what happens even in Dubai, in the Middle East. Global outlook?

Well, first of all, let me -- there's a lot of old friends in this room, so it's great to see your faces. And Rich worked on our IPO, so he and I worked together in 2005. And I just have always regarded you highly and we always wanted to do this conference and appreciate everything you've done to support our company. And we always have Rich go first on our earnings call, as you know...

And there was no bribery or anything.

Which is -- well, it's a testament to the fact that you and I worked together to build this company and -- to a certain degree, and so thank you very much, and we're going to miss you. Yes, it's interesting because we're somewhat feeling a sense of optimism. And I think it was almost like, for 2 years, everybody said recession was right around the corner. And people were looking at consumer spending and consumer savings and credit cards and all this. And everybody said, "Well the lines are going to cross and everybody is going to run out of money and we're going to go into a recession." And then I felt like, earlier this year, maybe the market just got tired of saying that. And we mentioned on our earnings call, for example, that in our mortgage space, 2/3 of the people that are up for renewal on their contracts are renewing at higher volumes than they had before. which is 1 segment of a global economy, but it's somewhat indicative of what we're seeing around the world, which is there's a sense that things are going well. In Europe, it was only last year that people were saying that there were going to be people dying in their homes for lack of energy and so on and so forth. And now just a year later, like everybody is like, "Oh, yes. We solved the energy delivery problems. We've redone the supply chains, and everything is fine." And so it's a long-winded way of saying, globally, we feel sort of a sense of optimism, with everybody having a little asterisk by it saying, "Yes, but there still could be some catastrophic economic issue out there." But they're -- it seems like they're taking it less seriously now, and we can see it in our contract renewals across the business.

I mean, when you look at your ICE's exposure, whether it be crude oil products, particularly European -- it's a global crude. Brent is global, but exposure right there to the sort of geopolitical risk. When you look at rates, the short-term Euribor contract, and mortgage as well. So is there any particular -- these businesses have improved and you have easier comps in energy. So is there any particular business that you think will thrive? And the flip side of the coin is anything you're going to be monitoring closely?

It's a good question because, really, I'm an engineer by education, and I think like an engineer, and I still was able to find a great bride who is willing to deal with me. But she -- I really wanted the company to be an all-weather stock. We use that word, we talk about it, that some part of our business will do well in a high interest rate environment, some part would do well in a low interest rate environment, some part we'll do well if we have inflation, some will do well if we have deflation. And so the parts of the business that are slowing are sort of calculated, in this environment, to do that. And the parts that are rising are calculated, in our minds, to do that. And it all seems to be -- and the net total is growth. And it all seems to be working pretty well. We run pretty much the global credit default swap market. Which credit default swap is, if you don't follow that market, it's essentially protection against somebody with a bond defaulting. And we had the biggest bond issuer almost default, the United States. And I don't know, it's just like we just kind of blew right through that, right? As a -- and our business is doing well there. And so I don't know how to explain it other than there's seems to be a sense that it's all going to work out, and ICE has a lot of products that help people hedge risk, and they're sort of being used around the world. With respect to Brent, it's interesting. I mean, I've been at this conference for so many years. There have been years when some of you in the room have grabbed me and said, "Do you think this is the end of crude oil trading?" And we're becoming a less carbon-based society, and yet, our -- and you could have that view. And yet, our crude oil is trading at record volumes. But then similarly, we're helping people with energy transition. So our emissions contracts; our renewable energy contracts; our green contracts; even natural gas, which is a transition for many economies from coal and crude to something greener, they're all doing well. It's -- I mean, you would -- when we talk -- when we built that complex, we thought we need to have the tools to make a transition, and one will go down and another will go up, and it will be part of the all-weather name. And never thinking, is it possible they could all go up? And they are. And so we feel very good about the business right now, even though I don't -- as an individual, I don't -- I'm not confident that we're not going to go through a recession, but I'm just not seeing any signs of it in our customer base.

I think you captured it. Things look good, but everybody's a little bit reserved.

Yes, yes.

The theme of the conference is The Celebration of Electronic Trade. So -- and we had Vinnie Viola, a fellow classmate, as well as...

Yes, I saw that. Always talking about hockey.

Yes, we did talk a little bit about hockey. But if anybody epitomizes bringing things electronic, the theme of electronic trading. I was there when you brought the -- not only the power exchange, but the IP in London, whether it's the New York Board of Trade. So I guess the question is -- that brings us right to mortgage. And you talk about the different businesses and diversification, but this theme of electronics has not stopped with you. And I guess the question is, as you look at it now, timing, you don't control the interest rate cycle. But has it lived up to your expectations in regards to sort of the momentum of conversion?

Yes, it's a great question. First of all, when I started ICE, Vinnie Viola was not was at the NYMEX and was doing everything in his power to prevent us from doing what we were doing...

[ People weren't -- yes to that. ]

Including trying to buy us. And sued me. He and I went all the way to the Supreme Court, and ultimately, ICE won. But he and I have been long-time friends and colleagues. I have tremendous respect for him, even though -- and then he saw the light, and he's probably done better than anybody in this room embracing electronic trading. Yes. So we -- it's interesting. I kind of have a dual answer, which is, I'm surprised that some company that was never in the mortgage business had -- is able to actually go into a brand-new business and affect massive change, and it's working. Like it's really pretty surprising, like there's -- the mortgage business is kind of at the heart of the banking business. It is the largest consumer loan, and banks really are in the loan business, and we've evolved the corporate borrowing into bond market now, and so that's kind of the mainstay of banking. And yet somehow with thousands of banks and millions of borrowers, nobody has ever just said, "We should automate this process and streamline it in the way we're doing it." And so I'm kind of surprised that we're the ones doing it. It's definitely being embraced. We are really growing the parts of the business that we have. We're trying to acquire some other pieces and in an argument with the government over that, which I think if we can affect that merger, that we'll be really able to affect change and benefit consumers even beyond what we're already doing. But the government will suggest that we would be very, very powerful, and I suggest that it's going to take a powerful entity to change behavior for an entire industry. So anyway, that's kind of the argument we're having. But we're doing well. And if you go back to the history of ICE, which Rich, you witnessed, reported on diligently for years, I started the company, but it became successful and Enron collapsed. And we went into a minor, call it, recession and a rethinking of corporate governance and everything that was surrounding that. And then we took off for energy trading. And then I started working on the credit default swap market in 2007. In 2009, we had a financial crisis and our CDS business took off. New York Stock Exchange, that stock was once like $120 a share, and it went down to $22 and it was an unloved company. And we stepped in and have completely rebuilt. Every piece of technology in that company is brand new. And we built that bridge while the cars were driving on it, in fact, driving 60 miles an hour over the bridge. These inflection points in businesses and in the economy are really the time that entrepreneurs should be building businesses. We announced recently one of the world's largest banks is going on to our mortgage system. A couple of years ago, when mortgages were rocking and rolling, they had mortgages coming out of their ears. And if you -- when you go in and talked to them about, would you like to abandon everything you've built and have us rebuild it on a different way? They were like, "We don't need to do that. We've got so much business here. I can't even keep up with it." But it's times like this when you can go in and talk to managers and say, "Now is the time to get ready for the next cycle." And we've done that over and over and over again. So while you can't choose your timing, you're right, when you do have these moments, you really got to lean into them. And most entrepreneurs think the time to build a business is when money is free and everybody is doing well. It's a good time to raise money, but it's not necessarily a good time to build a business. All of the big tech companies, if you go back and look at them, they all came out of the dot-com boom. All their competitors fell away, and then they became these monoliths. And so I like these periods, even though you got to navigate them.

I got to take the liberty to tell one story. It's my last conference, I'm going to -- but Jeff told me, and I've competed this story over the years, but back right before the financial crisis, we're talking that volumes at the exchanges had ballooned, had increased. And he said, "The CEOs of exchanges, we've had it easy because electronification had boosted volumes." He goes, "Where I see things going is more towards the backlogs, more towards clearing, more the things that aren't the sexy upfront matching engines." As I joke with Jeff, I said, "Now it did take a financial crisis to" -- and the truth of the story is you went out and bought clearing assets. Chicago Clearing?

Yes, the old Board of Trade Clearing Corporation, which at one point, was the largest clearing organization in the world. But then after they moved their business to CME, it went to 0, but they had all the infrastructure there.

There you go. And lo and behold, I think governments now look at clearing as a systematic -- that it is that important, swaps were forced into clearing to try to reduce overall systematic risk.

Right. Well, and you're going to be talking to Chair Gensler here shortly. There are still assets that are not clear, that the government, for example, the treasury market. And the Chair has talked a lot about treasuries, and we sort of had a near-death experience in treasuries and whether they're going to be a default. And certainly, we saw Silicon Valley Bank and other large regionals that had tons of treasuries on their balance sheet that turned out to be much to their demise. And so there's another asset class, that even something that's considered the gold standard of assets by people around the world, you still have regulators saying, "Maybe those should be cleared."

It would be an interesting question if we can get them off of equity market structure and crypto right now. The -- another asset class that you've delved into is the fixed income data business, data and analytics. It's another asset class that hasn't moved somewhat -- it moved somewhat electronically, but it hasn't gone full fledged. I guess what are your thoughts on how you're positioned? I know you've done well in munis. The business is recurring, it continues to grow consistently. But what are your thoughts about that asset class.

Yes. So I've been transparent that we were late to get into that class, and Bloomberg and MarketAxess and Tradeweb had already started the analog-to-digital conversion of trading. And so -- and clearing is -- and the consolidated tape is basically an industry utility. And so we looked at it and said, we want to be in that business because there is an analog-to-digital conversion. Where are the points that all of those people are ignoring? And that's really how we got into the business that we're in. It was an area that we were late. I didn't see it as early as some of those guys. Actually, we saw it, and we didn't think it would be as valuable as it's become. And so we said, "Okay, we think fixed income is going to be traded." Owning a bond is hard, and particularly for a consumer or a family office, we think there's going to be more ETFs built that are going to make a different kind of security that will be easier to own. And you want to build a ladder. And also, those people are going to need indexes and they're going to need to mark to market, and they're going to need all these back-office services. And so that's, going back to your earlier comment, it was an obvious area to us where we felt we could lean into and do well, and we are doing well there. We also saw that -- the platforms that I mentioned were really focused on the corporate bond market, and we said there's also -- there's a government bond market, and there's also -- which people -- some of our peers and competitors are in. And -- but we saw this municipal bond market, which largely, if you don't follow that, it's retail-oriented because they're tax-exempt. And so they have particular allure to small family offices, small institutions and retail, which is not the client base that those bigger platforms we're going for. So we said, "let's go there." And it's done well. And we do have such a big footprint globally that we're able to take that sort of retail-type market and expose larger institutions to it, who do want to participate and see that flow and see the trading opportunities, even though the real, what we call the paper, the paper and oil -- or the big oil companies, the paper in the muni market, are retail consumers and their advisers. But others want to interface with the paper, and we're doing -- it's taken a while. We've rebuilt a lot of the highways to get people to it, but it seems to be doing really well now. So I feel good about it. There was kind of a pause here as interest rates went up with some of the large fixed income managers on what they're going to do? And are we going into a recession? There was kind of fear in the market, I would say, a year ago. We were talking about this. But that seems to now be pretty much dissipating except for the one little asterisk everybody says it could happen.

I want to leave plenty of time for the last question. But the only thing about fixed income, it does seem like it's going in, I don't want to -- know not an evolution, but more demand for real-time pricing. And how -- will you be able to move -- be flexible enough to participate?

Yes. So only a small percentage of the fixed income market trades every day that can discover a real-time price. So the vast majority is -- certainly over 80%, and may even be over 90%, of the instruments that are in the world don't trade. So they -- and they still need -- people want real-time pricing because they may be thinking about selling them, and they certainly need end-of-day pricing to mark-to-market. And so that's all done through algorithms. And we have developed. A predecessor company that we acquired that has been developing those algorithms for a decade. And they've had constant feedback from the market and they continue to get constant feedback. So very hard to replicate, particularly because it's not just having the algorithm. It's having confidence in the outer that you'd actually stake your own money on the output of that algorithm. So I don't think that's going to go away just because of the nature of fixed income. I really think that the real-time market is going to be on the run, large names, recently issued kinds of transactions. And the vast majority that are going to be sitting in ETFs and in fixed income managers are sedentary, but still need real-time pricing, that's the kind of thing we can do.

I've waited -- of all the CEOs to step up here, I think I wanted to ask you this question more than anyone. And it's because of your expertise and knowledge of bringing markets electronic. And it's a technology question to wrap up. We're seeing advance -- as far as society, we're seeing advancements in technology, with AI, with ChatGPT. When you sort of -- when you created the framework to think about this, at least to me, even prior, when you talked about taking in massive amount of data, processing that data to instantly, efficiently make decisions. At least -- and again, I rate myself a 2 on a scale of 10 of knowledge of ChatGPT. But anyway, the question is, where -- does this technology have a role to play in the trading business, in the exchanges business, in the clearing business? Because I know your weekly - whether it's a weekly or biweekly strategy sessions, I just suspect you might have discussed it.

Yes. No, we've been really talking about it, trying to figure it out, like everybody. So a lot of our peers have done deals with the big cloud providers and are doing prototype work around this, and we've gone just the other way, which is a lot of AI and language providers have approached us, let's do some benchmarking prototyping and what have you. And we say to them, "Okay, great." We have one of the largest financial databases in the world, of both third-party information who use our networks and our own proprietary information. We say to them, "Why don't you give us one of your prototypes, and we'll run it in our data center?" And they say, "Well, why don't you give us our data and -- your data, and we'll run it in our data center?" And we say, "Well, we're in the data business and you're in the software business. We should just license your software and then we'll control it in our environment." And they're like, "No, no, no. You don't understand. We're doing this -- we need all this computing power, and you got to do it in our environment." And so our antenna have gone up that, wait a minute. We're trying to ask questions about who owns the data? What is the title? What are the copyright protections? How -- if there is a consumer use of this, how will we charge for it? Who will bill it? None of those questions are answered. And so we have, in our company, said, "No one can bring that stuff into our data center." We are -- and we've gone and got a team, and we're going through all of the data that we have, every little nook and cranny, and we're inventorying and asking ourselves, what are our proprietary crown jewels? What are some interesting pieces of data, but they may be available elsewhere? And what is really public domain data that is ubiquitous, but it happens to be in our data center? And we need to know that, and know -- I talk a lot on earnings calls that, in a grocery store, you have to have milk, butter and eggs, but everybody makes their money selling rotisserie chicken. But you got to have milk, butter and eggs to get somebody to come to the store. And so I want to know, what are our rotisserie chickens; and what is the milk, butter and eggs? And until we can figure out how we can perfect our ownership rights in that, we're not going to let any of this stuff get nearby. I'm happy to let one of my peers go figure that out, but we haven't been able to, and we haven't been able to get straight answers yet. I think, ultimately, there's going to be a lot of open source models, I think universities and others are working on things, they will be open source models, and the software itself will not be particularly valuable. What will be valuable is the data set that, that software runs on. And I think, ultimately, we and lots of our peers in financial services will have these models available in our networks and data centers, and the people that run these models will be doing so in our container and not -- and this stuff will not get commingled with the broader information that's on the worldwide web. That's my guess.

We're going to check those bread crumbs out. Those are the bread crumbs to follow. Unfortunately, we -- our time is up. But I want to thank you for -- Jeff and Kelly, for your friendship over the years. Watching you grow this multibillion -- I'm not even calling it an enterprise now, has been an experience.

And I will see you soon because we've asked Rich to come in and ring the bell at the New York Stock Exchange in honor of all the work you've done, so thank you.

Which is an honor. Thank you.

Great.