All right. Well, thank you, and good afternoon, everybody. It is my pleasure to welcome Jeff Sprecher, Chair and CEO of Intercontinental Exchange, one of the largest global networks of exchange products, fixed income data, and mortgage solutions. Over the course of 2024, ICE achieved several milestones, including record results in its industry-leading energy franchise, re-acceleration in the firm's fixed income business, and progress in integrating Black Knight into its mortgage business, with that deal closed about a year ago. So, w e look forward to getting an update from Jeff across all of these initiatives and, of course, your thoughts of what's next for ICE into 2025. Always great to see you here. It's December, so it's time for one of our chats again. So thank you for being here.
Thank you, Alex. Enjoy being here.
Yeah. So I wanted to start with a question on just kinda some of the current events, new administration, regulation. It's a bit of a macro question, to be honest, and obviously nobody quite has a crystal ball, but the new administration is likely to have meaningful policy and regulatory changes across a pretty wide spectrum of businesses, whether it's energy or financial services. You guys operate across a number of them, if not all of them. So what are some of the key implications for ICE on the back of potential regulatory change? What would you be the most focused on?
First of all, thanks for having me. It's a good question. They're, I guess if you look at the cabinet nominees and ambassador nominees so far, in the new administration, you have Lutnick, Bessent, Thiel, Stephens, my wife, Loeffler. You have this cohort of people that are really successful, people that have come out of financial services and, to a certain degree, non-bank financial services, a lot of financial services infrastructure, actually.
I t's a huge percentage of the nominees so far. So I just feel like, number one, that the administration's got a ton of domain knowledge about what we're doing. Specifically , I think a part of President Trump's appeal was that he was gonna deal with crypto and, to me, that's broadly fintech. And there's a couple of bills that have floated around Congress that I suspect will either become one bill or stay two bills, but it'll probably be the opening salvo. I don't think they'll probably pass in the form that they're in, but they'll create a skeleton against which people will try to, I suspect, move something. One is jurisdiction.
Who has jurisdiction over crypto and broadly t okenization? And secondly, what is the future of a stablecoin or a bearer instrument that currently may not go through AML and KYC checks? And I suspect those will be dealt with, but before Congress does something, I really do feel like this, the domain knowledge that's within the administration and the new heads are going to be changing the regulatory compact. And one of the areas where I think it's gonna be the most felt is in traditional finance, not crypto and fintech.
But I really do feel like, there's a sense that if you look at the great industries of the United States, President Trump has talked about energy. There's a lot of talk about making sure that agriculture and the right food source is part of our economy. And we obviously have tech, and there's a lot around Mar-a-Lago, with Elon there and David Sacks and Vivek and Marc Andreessen is advising. It feels like the tech's gonna be dealt with. The other big industry that, in my mind, the U.S. has is finance, and President Trump has talked a lot about protecting the dollar. And I really think that, part of that is improving the banking system, making the U.S. the banking system to the world.
And so it's a long-winded way of saying, I really feel like my company, which provides technology and services to both fintechs and traditional financial services, will do well because I think our customers are gonna do better and whenever your customers are doing better, it's good for you as a vendor. So I don't know. There just seems to be a honeymoon period right now, and kind of an animal spirits that's been unlocked around finance that feels pretty good as we sit here today.
Yeah, well, fingers crossed.
Yeah.
All right. Well, let's talk a little bit about your different businesses, and I would love to start with the energy trading business. It's still your largest business, which d oesn't get as much light with investors as it used to, but it is clearly still quite important. It's tracking incredibly well. I think revenues are tracking up 25-plus% in 2024, so far. And, and importantly, it's really across a very broad range of products. It's oil, it's gas, it's environmentals. The thing that we track closely is, of course, open interest, and it's nice to see that a lot of that growth is coming from open interest, which to some extent indicates a wider user adoption. So let's talk a little bit about that and unpack where the growth is coming from. What are the customer bases that are you seeing most expansion with?
And the question that I get mostly is like, well, how durable is it? Right? Because w hen people think about trading and volumes, there's a mean reversion in nature to that. Is that true for your energy business, or could this kinda growth continue?
So a couple questions in there. Maybe to start with the latter. We look at open interest, which are the open positions in our clearinghouse. As when markets are in contango, it's a good predictor of future volumes, because people don't generally put on positions. These are risk management positions. They generally don't put them on and forget about them. They put them on, and then over time, will go back to manage that position and fine-tune it. And so open interest is a pretty good predictor of future trading volumes and which ultimately result in higher revenues for us. That feels good right now, and you can see it, as you mentioned, all across our spectrum.
And I think the underlying reason is that there's been a broad analogy to the digital conversion of all kinds of trading and more algorithmic trading, more. I don't know, people that are looking at second- and third-order impacts when they're thinking about risk management. But something seemed to happen around COVID, where we reordered the supply chains of goods and services and maybe no more so than energy, partly because of the conflict in Ukraine and the reorientation of the way Russia and China and others take energy overlaid with, okay, we're gonna have to make change, but we really are in an energy transition. And so that change isn't necessarily going to be coal and nuclear, as much as it's being talked about now, is still a very long lead item.
And so you've seen traditional fossil fuels that have bridged the gap, and the investment that is being made is not something that's going to be short-term in duration. So we feel good again about the globalization of the energy supply chain. And now, again, with respect to the U.S., with President Trump really suggesting that he wants to lean in and make the U.S. the supplier to the world for energy. And if you talk to people around the president-elect, there's a sense of making sure that our energy is making its way into Asia, to non-China Asia, to maybe lessen some of the tentacles that China has in the region, to get Western shipping into that area so that those shipping lanes have a reason to be defended.
There seems to be this kind of, I don't know, macro State Department element to what the president-elect is saying, all of which means risk. There'll be more risk management. So we feel not only is the open interest predicting a good future, but the politics of energy is in our favor right now.
Somewhat related to that, but looking a bit further out, there's been a lot of focus on AI across various industries and, in particular, the impact AI will have in global power demand. And we've talked a little bit about that, but curious to get your updated thoughts on the fact that ICE does obviously have a leading franchise in energy, how they could more structurally impact the demand for hedging over time and product availability that you guys have within the firm to serve that need.
So it's the whole AI move is impacting us in multiple ways, probably like most of your firms. We just announced that we're launching electricity trading in Japan for the first time. Again, that's kinda following that energy chain that we see moving into Asia, but also doing it in the form of electricity. And when people are hedging electricity, they're really looking also to the underlying products, which the marginal fuel for much electricity tends to be natural gas. And so the so-called spark spread, which is a basis trade of where's that energy being produced? And of course, the minute you're talking about natural gas that may be imported and is ship-borne, you now have a transportation component and a weather component that could impact that supply chain.
So electricity itself has a lot of interesting knock-on impacts in terms of helping people manage risk, all of which we participate in. And separately, my company, like many, has been investing in AI ourselves and trying to make it net positive, not expensive, not a net expense. So we've been using a lot in our help desks and customer support areas and some of these areas that many of you are doing, and it's paid dividends. Also, copilots in writing computer code.
And then lastly, we've been building out our own data centers because we operate our own data centers with the expectation of a lot more capacity need by our customers that are gonna be running models in our data center against our data sets that we wanna keep, within the confines of our four walls so that we control the intellectual property rights of that data. So we've been doing a lot of build-out, with the anticipation of selling future compute and memory to people.
Yep. Last topic I wanna touch on with respect to trading are two themes. You hit on one of them, which is crypto. The other one is retail. Both of them, I think, are quite topical, especially post the U.S. election. What opportunity do you see for ICE across both of these, whether it's on the digital asset or crypto specifically and retail trading as well?
Yeah. I think the allure of crypto for my company and many of you and Goldman Sachs is this notion of tokenizing things. O ne of the net benefits of COVID and maybe even more specifically attributable to Robinhood was the notion of buying a fractional share of stock, which hadn't been allowed prior to that. Tokenization is simply just, in my mind, a way of taking an asset or a group of assets and slicing and dicing and making it transferable, often in a bearer instrument that will need the right regulatory compact for money laundering put around it.
But I do think that if this administration creates a rule set that is understood by the industry, then you're gonna see a rapid uptick of that the notion now of having a wallet that exists on your phone, having your life managed by a device in your pocket is so common, and particularly to younger people, that I just feel like a digital wallet is part and parcel to everyday life for people. And they're gonna wanna keep as many digital assets in that wallet and be able to mark to market, see their net worth, see their ability to transfer and spend, and fractionalize everything that people do in life.
So I'm somewhat bullish on conventional financial services adopting more of those types of tools once the rules of the road are better understood.
Yeah. I gotcha. All right. Let's shift gears a little bit. I would like to spend a couple of minutes on fixed income data business for you guys. This is a part of the market that's clearly seeing some cyclical recovery. We've seen fixed income flows generally come back. Fixed income markets obviously have done quite well this year with expectations for lower interest rates, and credit spreads have been obviously pretty tight as well. So thinking about what that optimism means for your fixed income data business, it's been a little while since we talked about sort of like a multi-year growth algorithm. So maybe you remind us what that is within fixed income data and what are the key drivers?
Sure. It's driven by a couple of things. First of all, it did feel to us like we went through a transition when we went from a ZIRP, zero interest rate environment to a higher interest rate environment. And if you recall, we were all having conversations are we gonna be higher for longer or those kinda things? And now, it just feels like the markets have said, okay, this is the environment that we're in, and this is my new basis, and I'm gonna make risk management decisions around this current environment. And so it just feels like investment decisions and CapEx decisions that our customers are making feel healthy and informed. And so against that backdrop and maybe again with AI, we just feel like there's gonna be more demand for data.
The algorithm for growth for us has been very much driven by new instruments in the fixed income space, predominantly exchange-traded funds, putting a complicated asset in a simple security that people can understand. Again, it feels like early days in the whole ETF movement in terms of now developing more sophisticated ETFs, having a Securities and Exchange Commission that is understanding the direction of travel and working with entrepreneurs to create more interesting products that ultimately are easy to access because they're common securities. We do well when AUM grows in that whole ecosystem. And I just feel like again, the algorithm that we plug in suggests that there's gonna be more AUM against more sophisticated products that are gonna include fixed income instruments.
I gotcha. The other important theme within fixed income is, obviously been private credit and really all forms of private credit. There's not a lot that you guys do in that part of the market, of course, today. But as you think about that addressable market and just the growth in that part of the world, are there things you could do with respect to data in particular when it comes to private credit? How are you thinking about that for ICE? Is it a tangible opportunity or not so much?
We do think of it as an opportunity. If you step back and say what does an exchange, what makes a healthy exchange and makes volumes grow? It's when things are standardized and transparent and widely distributed. And so, right now, those debt markets are non-standardized. And part of the allure is they don't fit the standards of a traditional bond issuance. They had a pretty limited number of players, so not widely distributed. But if you look at our data business, we have a large competitor, and the two of us pretty much are the go-to firms for reference data in fixed income. And as the markets continue to grow in private credit, secondary and tertiary markets we think are gonna form up.
Some of those companies are gonna wanna lay off some balance sheet risks. Some of their investors are gonna want liquidity in the products that they have. And it just feels like the first stage of that is to build foundation of data sets where people that do wanna buy these instruments or derivatives or pieces that are created from those instruments have a place to go to look up the key factors. And so we kind of see it as build the foundation in the data sets. We might start to see some standardization in the way that secondary and tertiary trading of complex instruments. And we're seeing there've been some announcements in the last week or so of more major players that are entering that space. So we do see a broadening of participation.
So early days for us as standard bearers, but it feels directionally like it's gonna go that way.
Right. Wrapping up the fixed income conversation, I wanna touch on fixed income trading as well. While we've seen some improvement in ICE's fixed income trading platforms over the last year or so, they still remain relatively small and kinda nichy relative to some of the other players in the space. I guess, how important is it for ICE to have a more robust pool of liquidity and execution venue when it comes to fixed income? The way you leverage that perhaps for real-time data, pre-trade analytics, etc. , would a broader partnership to add scale here make sense at all, or they're just kinda additive but not essential?
Yeah. It's a good question. The business of trading securities, including the biggest venue for trading securities, the New York Stock Exchange, in and of itself is not a particularly good business. Where the New York Stock Exchange is valuable is all the other services that it provides around the actual trading of a security. But the thing about a security, foreign exchange or an infrastructure provider is that we don't control the product. We have no intellectual property in it. It was created by somebody else. Somebody else makes a listing decision, decides when to list it, decides to delist it or merge it with somebody else. And so, you're just providing a platform. And so the main service you provide is distribution. But increasingly in this era, it's easier to create a network with technology.
O ne with social media and the way you can have access to people now if you have a good product, the distribution almost flows. So it's a long-winded way of saying trading itself of a product that you don't control is in over the long some of these stocks have been great, by the way. So I'm not trying to be negative. The analog to digital conversion is a very good moment in time for those kinds of markets. But as they mature, they're not defendable. And so what we've been investing in and what I've talked about is the foundations around that, the indices that where you do have intellectual property, the data sets that are unique, licenses and things that you can do to help people that are creating securities.
And so we haven't. I would have liked to have ridden the analog to digital conversion. We were late into it. And so we just said, let's put all of our energy into building the other high-value things around it. If we had a robust platform that traded some of that, would it help? Maybe. But, generally speaking, with the TRACE tape, as a requirement in the U.S. and now moving into Europe where there's complete transparency of pricing for execution, all you're doing now is talking about a small moment in time when the platform itself has information that the rest of the market doesn't have. That doesn't seem to be that valuable.
Yeah. The sustainable mode is just not the same.
Yeah.
Okay. Let's talk about mortgages, sort of the third leg of the stool for you guys. It's clearly been a tough environment for the last couple of years. We know the stats there. I guess at the same time, underneath the surface, you've integrated the platform to cover really the entire lifecycle of a mortgage at this point. You've expanded your network. And also you've announced a number of very sizable deals with a few banks in the mortgage space. So, help us maybe understand when some of these kinda structural things you've been working on will make its way into better revenue trends 'cause so far it's been obviously pretty muted.
Yeah. So, what we've built and what we're trying to build and the vision here is to have another network. So no different than the securities trading networks that I just talked about, where every new participant on the network makes the network more valuable to all other participants. That's the network model. And every new piece of content that's put on the network can be distributed to everyone else on the network. So build it once, sell it many times kind of thing. The construction of a mortgage has been very much paper-based, bespoke. T hey ended up in mini-storage warehouses and cardboard boxes with a barcode on it. And so what we've built, as you said, is an end-to-end lifecycle for the construction of a mortgage, which if you step back is the cash market.
It's the original homeowner. And right now that business, and for anyone in that business, is very much volumetric. When lots of people are buying or refinancing homes, the business is good. And when interest rates go higher or some we have a financial crisis, the volumes go down. And so it's kinda ebbed and flowed. What we've been doing is converting the business to a subscription model with access to a network, and literally trying to bring every home mortgage in the United States onto that network.
I think the real value will be the leg that we're building right now that we've been pretty transparent about, which is to hook the cash market to the financial markets, for the trading of whole loans, or sending loans to Fannie and Freddie to be underwritten, and for the capital markets to tell the loan officer that's working with a couple that's buying a house, what the current price of that mortgage is according to the secondary and tertiary trading of mortgages. That piece of the network, we think the capital markets piece can grow. It's a derivative and it will not be completely bound by the number of mortgages, and we have a lot of expertise in that space. We talked a lot about our fixed income platform.
So we know everybody in the industry that buys securities and securitized instruments. And we feel like we'll be able to deliver a really interesting data set of the underlying home mortgages and the actual whole loans themselves that can be put into securities.
How far away do you think we are from that? So how far away are we from the kind of idea that some of this transition and kinda the hook, as you described it, of the cash market to financial markets c ould actually start to materialize in the kinda that derivative activity that you described?
I think it's a vision that we have. I mean, this is the vision of what we're driving towards. And so it's got a lot of attention inside our company in terms of building out what I just said. You may recall that when we tried to buy a company called Optimal Blue and the Biden administration prevented us from doing that and basically said we wanna create more competition. And if you wanna be in this space, you need to go build it out. Optimal Blue was a network that hooked the financial markets to the cash mortgage market. And so we said, okay, fine. We were very public. We will go build that.
And so we've had a lot of work going on, and we actually put together an advisory group of people from the financial services industry that participate in this space to advise us on what format should it be in and how do you wanna see it and what are the first things we should deliver. And so all that's underway. We have a big convention that we hold every March. And so oddly, in my company now, and we're on the mortgage space, we inherited this convention, but it's big and we keep it going and have grown it. We try to have everything so that what are we gonna talk about this March? What are we gonna talk about next March?
So you'll see as we get closer to March that we'll be making a lot of more detailed announcement about where we are in that vision b ut it's high priority and we're building it out, for sure.
Yeah. The other interesting synergy from all these pieces within the mortgage ecosystem you talked about is data, and not just using data for financial purposes, but also using data for other forms of economy. And the value you're getting from seeing the mortgage from the beginning to the end is quite substantial. So where are you guys on the build-out of that data set? And is that something that will be materially impactful, call it, over the next year or two, three? Kinda how do you think about that?
Yeah. In our data set, we have better knowledge of when an existing homeowner is likely to prepay a mortgage. Like, for example, we know that they've applied to refinance before the market knows. We know they may be looking at another home. And so we have now, we're in the market right now talking to a lot of mortgage-backed security holders about what form we would give, how we would anonymize that data and give it so that it would actually be helpful to people that own MBS and that price MBS every day. We have pretty much everybody's mortgage record. There are all kinds of consumer protection laws around what we can share and how we can share it.
But we have these massive data sets that can be anonymized and trend-based. And so those are products that you're gonna see us in 2025 continuing to talk a lot about because the industry is really anxious to have better tools for pricing, not the mortgage itself, but the secondary and tertiary instruments that exist around the mortgage space.
Yeah. I gotcha. All right. Let's hit on capital management and acquisition philosophy for ICE's. It's definitely a topic that's very top of mind for investors. You're making really nice progress towards your leverage targets and you're getting closer to resuming share repurchases. Where do potential acquisitions rank in your priority list right now? And I guess, with three sizable verticals in place, what are the areas where you think it would still make sense to add inorganically?
First of all, you've alluded to the fact that about a year ago we did a major acquisition in the mortgage space and we promised that we would end our share repurchases, told the street that we would pay down the debt. We're well along that journey. I'm not gonna guide you to it, but anyone that follows our ICE quarterly can see where we're in that journey, and so we're anxious to have more free cash flow that would allow us to go back in and do share repurchases, which has historically been a piece of our capital return strategy. One of the nice things about running these networks and having thousands of people plugged into them is that we see the products that people and services that people want that are going across the network.
We have just a lot of ongoing conversations about what people's desires are, what they would like to see us do next, and so, for us , we see the ability to do bolt-on acquisitions where something's already plugged into our network and we're already capturing some of the economics through providing the network services where we could maybe capture all the economics and accelerate its growth if we were the actual owner of it, and so we've never shied away in the whole history of our share repurchases from doing small bolt-on acquisitions that can be highly accretive and easy to integrate in terms of large-scale things, I don't know .
It'll be interesting to see what the animal spirits are like, who's gonna run the FTC and DOJ and whether M&A, whether there's an appetite for investors, you all in the room to see companies do M&A or whether, feels like right now while we had done some deals and not been in the market, our investors were like, good, we're glad you're not in the market. We like what you're doing. Stick to the knitting, because the environment was so difficult for people that were trying to do bigger deals. I don't feel we need to. I've talked now for, I don't know, 20 or 30 minutes here about all the things that we're doing inside that just feel like there's upside to them. So we don't feel like we need to do anything.
And it puts us in a position to be opportunistic, I think. The right thing came along for, I tend to buy scratch-and-dent merchandise, honestly. Those kind of opportunities, you have to be prepared if a good opportunity comes along, and have the right mindset. But also you can't really scratch-and-dent the inventory yourself. The market has to do it, so.
Right. Okay. Well, we'll leave it there. Jeff, thank you very much. Appreciate you being here.
Thank you so much. Thank you all.