Jeffrey Sprecher built a better mousetrap. But a mousetrap big enough to catch a whale? Apparently so. Sprecher is the founder and president of the Intercontinental Exchange (ICE) based in Atlanta. For all practical purposes he is the poster-boy of electronic trading and the man responsible for the meteoric rise of commodities trading. He’s also about to become the owner of the New York Stock Exchange. Do I have your attention yet?
In little more than a decade the commodities market has gone from $10 billion– a speck on the trading horizon – to more than half a trillion dollars. Nathaniel Popper’s front-page story in the business section of the New York Times today pulls the veil back on Sprecher the man and describes how he grew a little-known southern exchange into a juggernaut capable of purchasing the vaunted New York Stock Exchange. As Popper himself writes, “It sounds preposterous.”
That’s because it is.
Popper’s piece brings forward a story that few people know. Most have no idea that trading exchanges are even for-profit businesses. And while he does a worthy job demystifying the business of exchanges he overlooks the planet-sized regulatory loopholes that allowed Sprecher to convert a small energy futures trading exchange into a global Franken-exchange that is buying the biggest, most well known exchange on Earth.
Sprecher was even a bridesmaid recently when he nearly scuttled a merger between the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange by coming in with a higher bid for the CBOT. The Chicago trading establishment was so freaked out by Sprecher’s surprise bid that they put their legendary differences aside and came to a deal faster than might otherwise have occurred had he not been breathing down everyone’s neck.
Though he was unsuccessful in his last minute bid, Sprecher moved deftly like a great white shark through the rocky financial seas in search of his next prey. Never sleeping, always moving, forever hungry.
To call Sprecher an opportunist would be technically accurate but cheap and intellectually dishonest. He understood the inevitability of electronic trading and the superior potential it held. If the Bloomberg terminal revolution was in providing information quickly and precisely then the Sprecher ICE revolution was in giving traders (and the houses they worked for) the ability to act upon information in the same fashion. My criticism of Sprecher – and Popper for that matter – is the way in which the story of the ICE has come to be told and accepted.
Missing from the brief history of the ICE are the loopholes that gave it life and the ability to flourish beyond imagination. It was the oft-spoken of – but rarely understood – “Enron Loophole” that gave corporations the legal right to trade energy futures even if the corporation itself was in the business of energy. This is the simplest way to convey its net result. The second loophole (and more meaningful for the ICE) was a maneuver by the Bush administration that granted the ICE foreign status as an exchange despite being based in Atlanta. This initiated a massive shift of trading dollars, and influx of new ones, onto the ICE for one reason: this singular move placed the ICE outside the purview of U.S. regulators at the Commodities Futures and Trading Commission (CFTC). Essentially, corporations could now trade energy futures electronically through the ICE without oversight or disclosure.
Sprecher has often stated that one of the great benefits of electronic trading is its inherent transparency. Theoretically, performing trades between parties on a screen reduces the likelihood of transactions being rigged. In some ways he’s right. We are unlikely to witness an old school “corner” where one party dupes all others into trading with it until it controls the vast majority, or position, of the item being traded. Electronic trading moves too quickly and there are too many players involved. But speed does not imply market transparency and openness.
Moreover, the mere fact that the founding investors of the ICE are some of the world’s largest investment banks and oil companies (Morgan Stanley, Goldman Sachs and BP) speaks to how little transparency there truly is. The fact that some of these banks (Morgan Stanley in particular) own and control oil companies and oil companies operate trading desks outside U.S. jurisdiction demonstrates how little need there is for small-time corners. Why pull off a two-bit corner when you have already cornered the entire marketplace?
Now, as Sprecher prepares to close on this historic transaction, investors, citizens and the government are about to be one step further removed from any realistic shot at transparency and oversight.
This in no way takes away from Sprecher’s genius as a businessman. It simply illustrates how willfully ignorant we are to the business of Wall Street and therefore how frightfully far away we are from properly regulating it. Everything Sprecher has done is legal and ethical; to the extent there is an ethos on Wall Street. Where all of this hits home for the consumer is at places like the gas pump and supermarket. The most important and direct relationship most of us have to Jeff Sprecher’s mousetrap is the high cost of the gas we pump and food we consume. Banks and oil companies have a vested interest in Sprecher’s success and in increasing their own revenues. Both are perfectly, mutually aligned. So far they have been able to grow profits with alacrity, free from federal oversight and bolstered by our collective ignorance of the process.
We’ve all been caught in Jeffrey Sprecher’s mousetrap. Now the question is will he “catch and release” or dispose of us in search of his next conquest. I hope he’s as nice and down-to-earth as Popper suggests.
Image: From 2008 Long Island Press cover story explaining the rise of the ICE and how Morgan Stanley became one of the largest oil companies in the world. For more on this story view the video below: