IntercontinentalExchange (NYSE: ICE) has appeared from virtually out of nowhere to become one of the major players in global futures exchanges and over-the-counter [OTC] markets. ICE specializes in electronic trading platforms and has certainly done its part in making all those colorful jackets worn by traders on open-outcry floors nearly obsolete.

In 10 short years, ICE has captured the globe, bringing market access and transparency to participants in more than 50 countries. Nearly half of the world's global crude futures trade in ICE markets.

The Atlanta-based company started out with a mission to make the OTC energy markets in the U.S. more transparent and efficient. ICE acquired London's International Petroleum Exchange (IPE, now ICE Futures) in 2001 and now operates the former open-outcry exchange on a completely electronic basis - a major leap toward opening up the energy markets to participants around the world.

In 2007 alone, ICE acquired the New York Board of Trade (NYBOT, now ICE Futures U.S.) and introduced electronic trading to the soft commodity markets, which include coffee, cocoa and sugar. The NYBOT had its origins in the New York Cotton Exchange and the Coffee, Sugar and Cocoa Exchange, both of which have been around since the late 1800s. The 120-year-old Winnipeg Commodity Exchange (WCE, now ICE Futures Canada), Canada's only agricultural futures market, is now also under ICE's wing, among other companies.

The move toward electronic platforms obviously ruffled a few feathers among open-outcry traditionalists, but its success is unquestionable. In the first quarter of this year, ICE's futures exchanges achieved record volume of 62.5 million contracts, up 39% from a year earlier. During the quarter, average daily volume exceeded 1 million contracts for the first time.

Quite The Contender 

While a bid for the Chicago Board of Trade (CBOT) fell through in 2007, the simple fact that ICE was there to make the bid and challenge the massive Chicago Mercantile Exchange (CME) is a testament to its growing strength in the marketplace.

Everything from Middle Eastern crude oil to Canadian canola and Florida orange juice trade through ICE over the Internet. Its broad range of products also includes currency pairs and equity indexes.

The credit crisis over the past year hasn't slowed ICE. At the company's annual meeting on May 15, Chairman and CEO Jeffrey Sprecher noted the company hasn't witnessed any "material" changes in liquidity over the past six months.

"In fact, participation and liquidity in our markets have only grown," Sprecher told shareholders, adding that ICE's clearing abilities both for futures and OTC swaps has helped boost the company's popularity. "We believe the secular trends in commodities are overwhelming the credit market dislocations that exist in the world today."

In ICE's view, the rising price of commodities isn't due to speculation, but rather market fundamentals, and that bodes well for the exchange's future.

"Demand for commodities ranging from metals and food to energy and fibers has driven prices to new high levels. With the weak U.S. dollar and competition for natural resources in the emerging markets, we believe the prices we're seeing reflect these world fundamentals. It appears demand for commodities will only expand in the future," said Sprecher.

This sentiment was also echoed last week by Charles Vice, president and chief operating officer of ICE, who defended the exchange amid calls from some U.S. lawmakers for more regulations to rein in speculators.

Vice said it was "highly unlikely" that ICE Futures Europe was the "primary driver" behind surging West Texas Intermediate crude prices.

Despite this, the U.S. Commodity Futures Trading Commission and its British counterpart last week reached a deal to impose the first trading limits on WTI oil contracts on ICE Futures Europe. About 30% of WTI trading volume is conducted through ICE, with the remainder on the New York Mercantile Exchange. Some lawmakers claim the lack of limits on ICE created what they call the "London loophole" that allows oil traders to evade U.S.-style regulations.

In an interview with HardAssetsInvestor.com, ICE's director of investor and public relations, Sarah Stashak, said that the company expects to see continued volume gains in its core business - energy and agricultural futures and OTC energy products. Stashak suggested that investors are still in the early stages of adopting commodities as an asset class.

ICE is also in the process of launching its own clearinghouse in the U.K. in mid-July. While ICE already does all of its own North American clearing, it uses a third-party clearinghouse for the U.K. energy and OTC products. Their own clearinghouse creates efficiencies, and will also make it easier to introduce new products. Stashak said ICE is looking at a number of OTC products to possibly introduce as cleared products.

Finally, ICE hopes to grow through options trading, which until now has not moved into the electronic realm as smoothly as futures. Stashak said recent acquisitions of Chatham Energy, which focuses on natural gas options; and Yellowjacket Technologies, which operates a peer-to-peer system for natural gas brokers, should help expand the options business.

Larger-scale acquisitions in the future may be tough, though, given that few options remain after the recent consolidation among exchanges, along with the fact that prices are trending upward to premium amid this merger mania. But ICE remains on the lookout for more unconventional approaches that may go unnoticed, such as lower-margin businesses.

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