How Important Is The Commodity Trading Business For ICE?

Intercontinental Exchange (NYSE: ICE) is one of the largest exchange operators in the world with seven cash exchanges and five futures exchanges across the globe. The company generates a bulk of its revenues from transaction fees on equity trading and commodity derivatives, which includes benchmark energy, financial, agriculture, and metal contracts. Trefis details trends in ICE’s Revenues over the years in an interactive dashboard along with our forecasts for full-year 2019 and 2020.

We note that commodity trading generated a little over $1.2 billion in revenues for the company in 2018 – representing roughly 20% of its gross revenues for the year. That said, ICE incurred $1.3 billion of transaction-based expenses, which are primarily associated with its larger cash equity and equity options’ trading business. As the company incurs negligible trading-related costs on its commodity derivatives offerings we estimate that ICE’s commodity business generates nearly 85% of the company’s net Transaction & Clearing Fees even through it accounts for just 35% of the company’s gross Transaction and Clearing Fees as detailed below.

A Quick Look at Intercontinental Exchange’s Revenues

Intercontinental Exchange reported $6.2 billion in Total Revenues for full-year 2018. This included four revenue components:

• Transaction and Clearing: $3.4 billion in FY2018 (55% of Total Revenues). It comprises of ICE’s electronic trading fees, private transaction surcharge, and other volume-related charges.
• Data Services: $2.1 billion in FY2018 (34% of Total Revenues). It comprises of data distribution revenues from subscriptions.
• Listing Revenues: $444 million in FY2018 (7% of Total Revenues). A listing fee is charged on an annual basis along-with fees related to other corporate actions such as stock splits and initial public offerings.
• Other Revenues: $234 million in FY2018 (4% of Total Revenues). It includes interest income on margin deposits, facility usage fee, market maker service fee, etc.

Understanding ICE’s Commodity Trading Business

• ICE’s commodity trading business includes energy derivatives as well as agricultural & metal derivatives.
• ICE’s energy derivatives can be classified into six asset types, Brent Crude, WTI Crude, Gasoil, Natural Gas, Power, and Emissions.
• Brent crude has historically been the highest traded commodity asset and a well-known benchmark for global oil prices. It alone contributed 38% of the 692 million ICE’s energy derivative contracts in 2018.
• Though, CME is the leader in WTI crude oil benchmark contracts, the increase in U.S. oil production has also led to an uptick in the few WTI derivative products on ICE’s exchanges.
• Natural Gas is the next biggest asset type in energy derivatives and had a contribution of nearly 30% of the total energy trading volumes in 2018.
• Considering section 31 fees and liquidity expenses to be associated with the equity business, the income from energy derivative contracts was $965 million in 2018, contributing 44% of the net transaction and clearing fees
• The agricultural & metal asset category is much smaller than the energy derivative category.
• Sugar has been the largest agricultural commodity by trading volumes under agricultural & metal asset category

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