ICE Positions as Valuations Vendor with Interactive Data Buy; Data Consumers Concerned by Potential Impact on Competition

During a conference call discussing the exchange's third-quarter revenues and the IDC acquisition, ICE chief financial officer Scott Hill announced that revenues from data services for Q3 2015 reached "a record" $209 million, up 24 percent over Q3 last year, and said that "data is a key driver for growth" at ICE.

From a strategic standpoint, IDC will enable ICE to become a "foremost provider of tools and information required to value risk across energy, agriculture, credit futures, equities, equity derivatives, ETFs, foreign exchange, gold, and now, fixed income," said ICE chairman and chief executive Jeffrey Sprecher. About 70 percent of IDC's $939 million annual revenues come from evaluated bond pricing, with the remaining 30 percent coming from technology platforms and datafeeds, Sprecher said.

Combining IDC's fixed income valuations business with ICE's previous acquisitions─including the New York Board of Trade (now ICE Futures US), NYSE's Euronext equity value calculator for valuing 95 percent of the exchange-traded fund market and SuperDerivatives' valuation service for complex instruments, particularly FX contracts─and the exchange's ICE Benchmark Administration interest rate swaps benchmark calculation service means that ICE is now positioned to help firms optimize capital adequacy and meet demand for data to support hedging and managing risk, Sprecher said.

The acquisition of IDC─in addition to previous ICE acquisitions─reflects that the exchange is shifting from a transactions-based business to one that is based on recurring subscription revenues, Sprecher said. "Market fragmentation caused by regulation, including MiFID and MiFID 2, mean that buyers who can't or won't spend money on technology will not necessarily find the seller with the best price, and as a result, the value of data is increasing," he added.

ICE is not the first exchange to move squarely into the market data business─for example, NYSE Euronext operated NYSE Technologies (including Wombat Finanical Software), prior to being acquired by ICE─though some data consumers are nonetheless concerned about any competitive advantage IDC users may gain from ICE ownership.

"It's a little bit unnerving that the source of core ICE market data will have a commercially competing service with other carriers, vendors and users. It's disconcerting that other people might have an inferior product," says a market data manager at a US market maker. "As a consumer of data, I'm concerned that while I may be able to get the ICE data from different vendors, IDC might have the inside edge─some advantage in time or space, quality or speed that tilts the equality of the system─whether it's insidious or not," the source adds.

In addition, a market data manager at a European investment management firm cites concerns that ICE may enforce a more aggressive pricing structure at IDC.

"If you look at recent acquisitions of index providers by exchanges, they have already gone aggressive on price structure, so I cannot see ICE being nice with IDC and acting any differently.... Exchanges are facing diminishing trading volumes and revenues from how they generate traditional income, so they have to survive and develop," the market data manager adds.

However, not everyone believes that ICE will have a negative impact on IDC's fees. "I'm not inclined to think we'll see any material changes in the short term, as IDC is a long-standing institution," says the head of market data at a tier-one US investment bank. "If ICE has plans to markedly change IDC, then they are coming into a competitive marketplace, and they can't double prices overnight and think it's not going to have an effect."

Addressing the possibility of raising prices for IDC's products, Sprecher said, "We don't know, as we don't own the business yet, but our policy at ICE is that increases in value-add should be coupled with appropriate price increases," though he added that "IDC has a 98 percent renewal rate, so it seems they are liked and respected at the current prices levels."

Sprecher also said ICE expects to save $150 million in synergies from the acquisition, particularly around IDC's 7Ticks network, its market data desktops, staff and redundant operations, though he declined to say whether the exchange plans to spin off these business or merge them with other ICE offerings.