Energy Derivatives Trading Not Enough To Offset Low Volumes For IntercontinentalExchange

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ICE
Intercontinental Exchange

Derivative trade volumes for IntercontinentalExchange Group (NYSE:ICE) have been low in the second quarter thus far. Limited trading activity for interest rate and equity derivatives has overshadowed the growth witnessed in trading of energy products including oil and natural gas derivatives. The exchange operator reported an 8% year-over-year decline in average daily trade volume to just under 5 million contracts per day through May. If this weakness persists, there could be a downside to our $222 price estimate for ICE’s stock, which is in line with the current market price.

Volumes have been subdued through Q2 thus far (about 10% lower than the comparable prior year period at 4.8 million contracts per day) with particularly low trading activity for financial derivatives. Below we take a look at a detailed break up of how the various derivative asset classes performed for ICE during May and in Q2’15 thus far. 

See Our Full Analysis For IntercontinentalExchange Group

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ICE’s U.S. and European trading platforms include futures and options traded across various asset classes such as interest rates, equities, oil (Brent, Gasoil, other oil), natural gas, power, agricultural commodities and metals. Consolidated financial derivatives trading was down by 26% compared to the prior year period at 2.3 million contracts per day, while total commodity trades (including energy, agricultural commodities and metals derivatives) were up by 13% y-o-y to 2.5 million contracts per day. [1]

Financial Derivative Volumes Remain Stifled

The total number of interest rate derivatives traded on ICE’s platforms were down by about 29% y-o-y to 1.2 million contracts per day through Q2 thus far, mainly due to tough year-over-year comparisons. In mid 2014, trading volumes of short-term interest rate derivatives were as high as 1.6 million contracts traded per day, which has declined to about 1.1 million contracts per day through April and May. On the other hand, medium and long-term interest rate derivative trade volumes have risen by about 22% y-o-y to 203,000 trades per day in the June quarter. Monthly volumes for May highlighted a similar trend, with short-term interest rate options and futures staying 35% lower than the prior year period at 1.1 million contracts per day while medium and long-term interest rate products traded 28% more than the previous year levels at 249,000 trades per day. [2] Management mentioned that with QE announced in Europe, the company could continue to witness low volumes of interest rate products in the short term.

Trading of equity derivatives has also been lackluster since the beginning of the year. During the month, ICE reported an average daily volume (ADV) just over 1 million trades compared to 1.3 million in the prior year period. Similarly, ADV for the quarter thus far stood at 958,000 trades, which was about 26% lower than the comparable year-ago period. 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 stood at 56,000 trades for the month and 57,000 trades per day for April and May combined. Comparatively, ICE witnessed only about 19,000 trades per day in Q2’14 in a weak environment for FX trading.

Growth In Volume Across Energy And Commodities

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. ADV for oil derivatives continued to be high through April and May as well. The average daily volume for Brent was up by 19% y-o-y to 708,000 trades in May. Similarly, Gasoil futures and options were up by 12% on a y-o-y basis to 239,000 trades per day for the month. Combined oil futures and options for the month of May were up by 20% over the year ago period to almost 1.3 million contracts per day. [3] Similarly, natural gas derivatives witnessed a 15% rise in volumes for the month to and ADV of 821,000 contracts per day. Combined trading volumes of all energy derivatives was up by 16% y-o-y to 2.2 million contracts per day in May. Furthermore, trading volumes for Q2’15 thus far were up by 13% to just under 2.2 million contracts per day.

Combined trading volumes for agricultural commodities and metals stood at 309,000 trades per day in May – about 14% higher than the prior year period. Trade volumes for the June quarter were about 16% higher than the year ago period period at 362,000 trades per day.

In its most recent earnings, ICE reported 9% y-o-y growth in net revenues to $1.1 billion for the quarter, driven by a 6% growth in the company’s transaction-based revenues to $812 million. On the other hand, ICE’s market data services revenues were up by 19% y-o-y to $187 million, while listing revenues were up by 12% to $101 million. [4] However, with the company reporting sluggish trade volumes for interest rate and equity derivatives in the June quarter, it is likely that overall trade volumes remain suppressed through the quarter. As a result, it is unlikely that the company posts meaningful growth in transaction and clearing services revenues in the second quarter.

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Notes:
  1. Intercontinental Exchange Reports ICE and NYSE Volume for May 2015; Energy Daily Volume up 16% and Ags up 14% over Prior May, ICE Press Release, June 2015 []
  2. ICE U.S. Futures Historic Monthly Volumes, ICE Group Investor Relations, June 2015 []
  3. ICE Europe Historic Monthly Volumes, ICE Group Investor Relations, June 2015 []
  4. ICE Q1 Earnings Call Transcript, Seeking Alpha, May 2015 []