IntercontinentalExchange Reports Sluggish Derivative Trading Volumes For March

IntercontinentalExchange Group (NYSE:ICE) released its trading metrics for the month of March, reporting a 7% year-over-year decline in average daily volume to 5.2 million contracts traded per day. Total commodity trades (including energy, agricultural commodities and metals derivatives) were up by 13% y-o-y to 2.7 million contracts per day while consolidated financial derivative product trading was down by 22% compared to the prior year period at 2.5 million contracts per day. ^[1]

In its most recent earnings, ICE reported 75% y-o-y growth in net revenues to $1.1 billion for the quarter, with much of the growth attributable to the NYSE acquisition in November 2013. Since the company sold off the European equity trading business Euronext NV in June, the company has equity trading operations only in the U.S. The total number of shares traded on NYSE in March were about 27% higher than the prior year levels at 7.2 billion shares. Below we take a look at how the various derivative asset classes performed for ICE during the month and our forecasts for those drivers. We have an $222 price estimate for ICE’s stock, which is roughly in line with the current market price.

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Volume Trends Across Energy And Commodities

ICE’s U.S. and European trading platforms include futures and options traded across various asset classes such as oil (Brent, Gasoil, other oil), natural gas, power, agricultural commodities and metals. Derivatives volumes have been high for oil products since the beginning of the year owing to the speculation among traders related to volatility in oil prices. As a result, the average daily volume (ADV) for Brent was up by 43% y-o-y to 894,000 trades through Q1’15. The ADV for March stood at 786,000 trades per day, which was 28% higher than the comparable year-ago period. Similarly, Gasoil futures and options were up by 17% on a y-o-y basis since the start of the year to 270,000 trades per day, while ADV for the month stood at 231,000 trades per day (8% higher than March 2014). ^[2]

On the other hand, natural gas derivatives witnessed a 10% volume decline since the start of the year with ADV of 1.1 million contracts per day. However, March was a positive month for natural gas futures and options, which were up by 9% y-o-y to 837,000 trades per day. There was no appreciable difference in combined trading volumes for agricultural commodities and metals, which stood at 336,000 trades per day in March. Trade volumes for the full quarter were about 5% lower than the comparable prior year period at 372,000 trades per day. Volumes could continue to be low during a tough period for natural gas product trading owing to macroeconomic uncertainty and geopolitical scenario in Europe.

Volume Metrics For Financial Derivatives

The total number of interest rate derivatives traded on ICE’s platforms were down by about 27% y-o-y to 1.5 million contracts per day, mainly due to tough year-over-year comparisons. In early 2014, trading volumes of short-term interest rate derivatives were as high as 1.9 million contracts traded per day, which has declined to about 1.3 million contracts per day in Q1’15. On the other hand, medium and long-term interest rate derivative trading rose by about 10% y-o-y to 203,000 trades per day in the March quarter. Monthly volumes for March highlighted a similar trend, with short-term interest rate options and futures staying 27% lower than the prior year period at 1.2 million contracts per day while medium and long-term interest rate products traded 4% more than the previous year levels at 178,000 trades per day. ^[3] Management mentioned that with QE announced in Europe, the company could witness low volumes of interest rate products in the short term. However, it is likely to impact only Euro-denominated trading. Management further mentioned that Pound-denominated products actually witnessed growth in the December quarter, which it has subsequently sustained through the March quarter.

Trading of equity derivatives was also lackluster during the month with ADV of 957,000 trades compared to 1.3 million in the comparable year-ago period. Similarly, ADV for the full quarter stood at 721,000 trades, which was about 18% lower than Q1’14 volumes. Volatility in currencies and speculation around the exchange rates led foreign exchange (FX) derivative trading to rise during the quarter. The ADV for  FX derivatives for the quarter stood at 59,000 trades, driven by a surge in March volumes (83,000 trades per day). Comparatively, ICE witnessed only about 27,000 trades per day in Q1’14 in a weak environment for FX trading.

The company witnessed 70% growth in transaction-based revenues to $811 million in the most recent quarter, while trade revenues for the full year were up by over 100% y-o-y to $3 billion. ^[4] However, with sluggish volumes for the March quarter, it is difficult to project meaningful growth in the company’s transaction and clearing services revenues.

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1. Intercontinental Exchange Reports ICE and NYSE Volume for March 2015; Energy Daily Volume up 16% over Prior March, ICE Press Release, April 2015 [↩]
2. ICE Europe Historic Monthly Volumes, ICE Group Investor Relations, April 2015 [↩]
3. ICE U.S. Futures Historic Monthly Volumes, ICE Group Investor Relations, April 2015 [↩]
4. ICE Q4 2014 Results, ICE Press Release, January 2015 [↩]