Energy, Commodities and the Internet, Part 1

The Intercontinental Exchange (ICE) has earned a reputation as a leader and successful innovator in the field of exchange-based energy and commodities trading.

Having launched a string of new exchange and OTC (over-the-counter) traded energy derivatives contracts this past year, the ICE’s total 2006 futures trading volume surpassed 2005’s previous record by more than 120 percent.

Average daily commissions in its OTC business segment increased 89.1 percent while the volume of cleared OTC contracts increased to a record 131.2 percent.

A key aspect of the Atlanta-based exchange’s success is the ability to design, build and maintain a globally distributed, Internet-based trading and information systems platform and, where required, to integrate electronic- and exchange floor-based trading — as is currently taking place at the ICE and the New York Board of Trade, which the ICE acquired earlier this year.

“We believe that some of the factors contributing to our success include our highly liquid global markets and benchmark contracts, our leading electronic energy trading platform, integrated access to both futures and OTC markets, our highly scalable, proven technology infrastructure, and the transparency and independence of our markets,” Mark Woodward, the ICE’s manager of regulation, compliance and emissions projects, told the E-Commerce Times.

Increasing Connectivity

The technology staff at the ICE has built and maintained a secure, reliable and high-performance global network and IT infrastructure, as well as a complementary set of real-time information, trading, clearance and settlement applications and systems.

This provides a rapidly increasing number of participants with 24/7 access to a growing range of listed futures and options, as well as OTC products and services.

Customers who trade both ICE’s exchange and OTC products have a number of alternatives when connecting to the exchange’s trading and information systems platform via the ICE’s Internet-based front-end technology, known as WebICE.

Connectivity options range from no-cost Internet access using existing broadband connections to private, fully managed wide area ATM networks that are managed by AT&T and monitored around the clock.

“We have thousands of active connections to our platform at over 1,000 OTC participant firms and over 460 futures participant firms. Most of our participants access our platform through the Internet,” Woodward said.

The exchange’s technology department is a busy place, to say the least.

During the past year, the ICE established regional telecommunications hubs in Chicago, London, New York and Singapore, significantly expanding connectivity and, in general, data and voice throughput for its growing roster of members. The hubs can accept Ethernet or point-to-point T1/E1 connections.

In December, the ICE signed a lease for additional office space at Two World Financial Center in New York City, which will serve as a state-of-the-art electronic trading center, as well as host exchange training and marketing activities.

“We intend to extend our initiatives in increasing connectivity by continuing to establish multiple points of access with our existing and prospective base of market participants. We also will continue to leverage the value of our market data by developing enhancements to our existing information services and creating new market data products,” Woodward explained.

At the Front End

Using WebICE, members can access the data via similar applications offered by any of 12 independent software vendors (ISVs). A growing number of these proprietary front-end applications come with added features that are built around the ICE’s electronic platform to connect to various dealer and prime brokerage systems, as well as algorithmic trading systems.

WebICE and recognized ISV products give qualified participants access to both exchange-listed and OTC markets.

“In the OTC markets, ICE’s electronic platform provides trade execution on the basis of extensive, real-time price data where trades are processed accurately, rapidly and at minimal cost. Our platform was designed to ensure the secure, high-speed flow of data from trading desks through the various stages of trade processing,” Woodward explained.

No fees are charged to participants who use ICE’s proprietary software interface. ISV-provided software can be developed to access the exchange’s electronic platform using open application programming interfaces, or APIs.

Customers can access ICE’s redundant data centers in the U.S. and U.K. using the Internet or a number of fully managed, wide area network private line alternatives, including routing through ICE’s regional telecommunications hubs. ICE also established a co-location program in 2006.

Innovation and Improving Performance

The ICE has earned a reputation as both a business and technological innovator in the energy and commodity markets.

“ICE is continuously enhancing our technology to improve speed, reliability and capacity,” Woodward said. “Since ICE Futures transitioned to all-electronic trading in April 2005, ICE has experienced a more than tenfold increase in message volume. We continually monitor and upgrade our capacity requirements and have configured our systems to handle approximately twice the peak transactions in our highest volume contracts.

Over the past two years, the ICE has completed several hardware and software upgrades, allowing the organization to reduce round-trip time and to increase throughput. In addition, it made system improvements to minimize downtime and greatly enhance reliability and stability, according to Woodward.

“Our efforts have produced substantial improvements in processing speed. As of the end of Dec. 2006, average round-trip transaction times were below 30 milliseconds, compared to more than 200 milliseconds at the beginning of 2006,” he noted. “Unlike most futures exchanges, the ICE trading platform achieves its high-speed results while also managing pretrade counterparty and clearing credit limits. This functionality provides traders and clearing firms with high quality risk management at the server level in the highly volatile energy markets.”

As part of its efforts to increase the speed and processing capabilities of its electronic trading platform, ICE implemented new trade/transaction matching engines for futures and cleared OTC contracts, rearchitected its internal messaging systems, upgraded its matching-engine servers, and tuned each component of the platform to maximize efficiency in execution and processing.

Improved APIs

It also improved its APIs to reduce customer bandwidth requirements, upgraded its network hardware, and reengineered its network, Woodward added.

Trade processing is a critical component of any exchange system. Most of ICE’s largest customers are connected to the ICE platform for back-office purposes, in order to facilitate straight-through processing for futures and OTC trades.

To enhance and standardize its back-office transaction processing capabilities, ICE has also deployed an industry-standard FIX (financial information exchange) API to complement its longstanding Java API.

“More than 20 firms, including many well known statistical arbitrage and algorithmic trading funds either have finished or are in the process of completing connectivity of their customized trading applications to the newly issued FIX API,” Woodward said.

The current focus of the ICE’s internal software development is on enhancing its existing platform to improve connectivity, functionality and performance in support of plans to increase trading volumes and develop new products.

On the organization’s list of priorities in 2007: to functionally enhance and realize performance improvements in its electronic trade confirmation service, as well as the development of technological infrastructure to support a new data sales component of its OTC business.

Energy, Commodities and the Internet, Part 2

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