Jeff Sprecher: One year later, another acquisition

December 17, 2015 03:00 PM

IntercontinentalExchange Chairman and CEO Jeff Sprecher was our person of the year for 2014 and an outspoken advocate for structural change in how markets work. We caught up with Sprecher at this year’s FIA Futures & Options Expo to talk about ICE’s recent acquisition of Interactive Data and market structure issues.  

Modern Trader: You talked about added fragmentation in the markets you served. Are you concerned there will be another push for fungibility in the futures space?

Jeff Sprecher: I am. Concerned maybe not the right word. There are a lot of exchanges and intermediaries that really do want a more fragmented market and do well in a more fragmented market, and have a voice when it comes to lobbying government. The premise is that it will give customers more choice. That is a false premise in that anywhere you look where there are fragmented markets customers have a difficult choice, and that is that they want the best price and simply try and reconstruct the market in order to find the best price. So in that sense they don’t have a choice. Most people that manage money have a fiduciary [responsibility] to their clients to find them the best price and most traders that are professional traders specialize in finding the best price so this fragmentation ultimately doesn’t lead to any choice, it just leads to increased cost.

MT: Are we revisiting the concept of freedom to clear? 

JS: I believe in open access, in that a clearing house should be obligated to take business from others. I think clearing is a business and we set up to act like a business, it is not a back office function any longer. Giving entrepreneurs access to clearing makes sense, but that doesn’t mean they should be able to net anything they do against other entrepreneurs’ positions. There can be some economic offsets that are given, there can be capital efficiencies that are managed but the actual netting of one person’s intellectual property against another is [wrong].

MT: Why is that not a good idea? 

JS: We are pushing back and trying to find a reasonable level of access. I do think that clearinghouses are going to be large, highly regulated, highly capitalized businesses and in that regard there won’t be many of them and it is incumbent on the operators of those to help foster innovation and competition. That doesn’t mean you should have to net somebody’s intellectual property against a free rider because all that is going to do is to lead to market fragmentation and not be good for the end user.

MT: You pointed out that small exchange players can access data fees even with a fraction of market share. Is that fair? 

JS: What lessons we have learned out of the equities world is that the sponsors of fragmentation are turning around and monetizing data and access so people are actually paying for third parties to trade in order to create data that they can sell and a venue where they can sell access to. I don’t think that it is a particularly healthy paradigm. Fragmenting markets, all it does is widen the bid/offer spread for the end user and all of that gets consumed in charges for this infrastructure. The sad thing about the state of our political system is that end users didn’t stand up and have a voice when a lot of these rules where contemplated and drafted and now that they are seeing the impact of them, they are asking for changes. We have been lucky in the United States that the CFTC has had the flexibility of delaying and maybe modifying rules to try and work with end users within the letter of Dodd-Frank but not harm the markets. In Europe we haven’t seen whether or not their infrastructure is going to be able to accommodate the real-world changes that are needed not to harm markets. 

MT: Are you concerned over fragmentation and the commoditization of data behind your acquisition of Interactive Data? 

JS: As trading gets fragmented, data becomes more valuable because market participants want to see the entire market and they want as much data as possible to figure out where they should do business in a fragmented market. Data used to be a bit of an afterthought for an exchange. If you are a dominant player in an exchange, anyone who logs into your system can see all the bids and offers and to a certain degree takes it for granted. But when a market is fragmented there is nothing to log into and you have to acquire that data and cleanse it and organize it in a way for you to see the market. That is what high frequency traders have specialized in. We think that is a trend that we should be involved in, which is gathering, cleansing, organizing and distributing data.

MT: Is that more important on the equities side?

JS: The equity side really informed our thinking on it but I do see the derivatives and regulated futures business becoming more fragmented due to the fact that Dodd-Frank will be different than EMIR and MIFID I and II. And China which is hard to do business in. You are going to have fragmented pools of liquidity in my mind as a result of  all the regulation.

MT: Will it be possible to offer competing futures products globally because of the bifurcated regulations? He says that with different regulations products will differentiate themselves, creating regulatory arbitrage. 

JS: Correct. They will be located in different areas around the world because end users are going to be doing business in different jurisdictions. That’s why we are setting up multiple exchanges and clearinghouses around the world so that our customers can have one technical platform but different regulatory jurisdictions in which to do business, but those markets will become fragmented. The price discovery will become fragmented due to the differences in jurisdictions.

MT: What are your concerns on spoofing?

JS: We benefit in the futures industry from exchanges that have deep pools of liquidity and good technology where we can use a technology to prevent these things. Now that the rules are being defined and the court case will further define those rules, we can build systems that prevent these things so that somebody doesn’t inadvertently get caught up in spoofing. In more fragmented markets we won’t be able to do that. We will be depending on an after-the-fact audit trail to police markets because no one person will be able to see the market. That is one of the unfortunate things about the fragmentation trends that are going on now.

MT: You pointed out several market structure issues causing problems a year ago, including payment for order flow. Has there been any progress?

JS: Most of those issues are still unresolved. If anything we have created more issues as there has been confusion over capital rules that have come out in 2015. I am not trying to be negative on regulators, it is very clear that regulators want to make sure that this financial system is sound, but what is difficult is that these are global industries and they are being regulated locally and that is a difficult challenge that is leading to  unintended consequences.
I don’t believe in payment for order flow. I do believe in having designated market-makers who are compensated, but paying for order flow leads to incenting people to wash trades and exchanges should be in the business of preventing wash trades and not encouraging them. That is one of the quintessential problems with payment for order flow.

MT: Has your attitude on colocation evolved? How?

JS: Our view on colocation remains that it is the fairest way to serve both the latency and non-latency sensitive customers. In fact, it was out of a sense of preserving fair access that the colocation business was born. We are focused on delivering reliable, resilient and secure access to our markets for our global customers who rely on our technology for mission-critical operations, including compliance with regulatory mandates. It is for this reason that we recently made several enhancements to our “SFTI” offering, which is our secure network that provides customers with reliable connectivity to more than 120 markets and content service providers. Based on the demand for market data, we have invested in several projects to increase the available capacity and performance of SFTI’s fiber network, and to introduce wireless network alternatives.

MT: Are you looking for additional growth/expansion opportunities in China? Elsewhere?

JS: We’ve seen rising trading activity on our futures markets from Asia in the last decade—across commodities and financials—for example Brent, gasoil, Singapore fuel oil, coal, softs, interest rates. ICE has had a presence in Singapore since the early 2000s to serve customers across Asia. Singapore is the commercial and physical hub for much of Asia’s financial, commodity and energy trading, and so launching a local exchange and clearinghouse is the natural next step for us.  By establishing ICE Futures Singapore and ICE Clear Singapore, we are ensuring the local infrastructure is in place for future derivatives growth in the region. It also ensures we are closer to our regional customer base, providing them with markets, clearing and risk management services in their local regulatory jurisdictions.

MT: What cyber security initiatives are you working on? How big of a concern is it?

JS: There is no question that cyber security is a top concern throughout all industries, and especially the financial sector. It is clearly one that we are all focused on. At ICE we take it very seriously and have made substantial investments to protect our customers and our systems. We work closely with financial institutions such as banks and other exchanges on addressing cyber issues through groups such as the Financial Services Information Sharing and Analysis Center (FS-ISAC) as well as with government agencies globally.

MT: What market structure initiatives would you like to see addressed by regulators?

JS: We think that the supplemental leverage ratio is greatly increasing the costs of clearing for end users, discouraging clearing and leading to decreased market liquidity. This stands in direct contrast with the G20 commitments made in Pittsburgh following the financial crisis. We’d like to see regulators take another look at this one.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.