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Why did Lone Pine open a position in IntercontinentalExchange?

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In the last quarter, Lone Pine Capital opened a new 2.19% position in IntercontinentalExchange Group, Inc. (ICE), a leading operator of global markets and clearing houses.

ICE pressoIntercontinentalExchange saw its total revenue more than double to $733 million from $324 million in the year-ago period in 4Q, but the company posted a loss due to the costs related to an approximately $11 billion acquisition of NYSE Euronext. Net loss attributable to ICE was $176 million or $1.83 per share, compared to net income of $130 million or $1.76 per share last year. The company also saw a $190 million impairment expense due to the impact of the devaluation of the Brazilian real on ICE’s investment in Cetip (CTBPF), which was made in July 2011.

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In January, ICE’s average daily volume (ADV) for global derivatives was 10.4 million contracts, a decrease of 8% compared to January 2013. Total commodities ADV increased 15% driven by the strength in the natural gas and agriculture contract volume. Total financial ADV declined 24%, primarily due to lower volatility in the European interest rates relative to the strong volumes in January 2013, a result of the long term repo operation (LTRO) repayment. Total contract volume in 2013 reached a record 852 million contracts, up 1% from 2012.

Last year, the company saw expansion from six to nine asset classes and completed acquisitions of ICE Endex and NYSE Euronext. The combined ICE and NYSE Euronext operates 16 global exchanges and five central clearing houses diversified across a range of asset classes spanning interest rates, equities and equity derivatives, credit derivatives, bonds, foreign exchange, energy, metals, and agricultural commodities. The company expects to conduct an IPO for the Euronext group of Continental European exchanges as a stand-alone entity. With the acquisition of the Singapore Mercantile Exchange, ICE expects to expand its trading and clearing operations into Asia.

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NYSE Euronext also owns Liffe, which has a huge share of the European derivative contracts market. Upon the successful separation of the Liffe and Euronext businesses, expected to take place in the first quarter of 2014, ICE will begin to transition Liffe contracts to the ICE trading platform and to the ICE Futures Europe exchange.  It is anticipated that the Liffe operations will be fully integrated by the end of 2014.

ICE hedge fundsICE said in January that NYSE Liffe will expand its index derivatives franchise with the launch of futures based on MSCI Factor Indices. NYSE Liffe expects to introduce the industry’s first futures contracts on MSCI Equal Weighted Indices and MSCI Minimum Volatility Indices, on February 3, 2014, via Bclear, the Exchange’s wholesale facility. ICE also announced last month that ICE Benchmark Administration (IBA) will officially take over as the new administrator of the London Interbank Offered Rate (LIBOR) from February 1, 2014.

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The company is focused on making progress on its debt reduction target, and continuing to invest in growth in a disciplined manner. The global markets operator said it is on track with its integration initiatives, including the transition of the Liffe contracts to its exchanges, the IPO of Euronext, and the divestiture of certain NYSE (NYX) technologies businesses as part of its cost cutting efforts.

ICE’s Liffe competes with NASDAQ OMX (NDAQ)’s NLX exchange and Deutsche Boerse AG (DB1)’s Eurex in the European derivatives market. Another rival CME group (CME) is expected to open its own derivatives exchange from London. ICE’s rapid growth has been driven by derivatives, especially energy futures.

Shares of ICE and Deutsche Boerse AG (DB1) slumped last month after the European Union opened up trading platforms and clearing houses to increased competition with revisions to market legislation known as Mifid II (Markets in Financial Instruments). According to news reports, the new rules, which seek to end speculation, increase transparency, stability, and lower trading costs, include provisions for “non-discriminatory access to trading venues and central counterparties.” The new provisions would make it easier for investors to initiate transactions at one exchange and exit them at another. Earlier, investors had to trade futures contracts at an exchange and process them through the exchange’s clearing house, under the “vertical silo” model. Analysts said the market’s reaction to the news was a “bit overdone” as sufficient details on the rules are not yet available.

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