ISE IPO An Eye-Opening Success

March 15, 2005

The investing public swoons over the NYC-based International Securities Exchange.

The International Securities Exchange (ISE) said yesterday that underwriters had exercised the full "over-allotment" option on its recently completed initial public offering (IPO).  That option boosted the total proceeds for the exchange to more than $77 million, and served as an exclamation mark for one of the most successful IPOs since the Internet Bubble.

Shares in the exchange debuted Tuesday, March 8, on the New York Stock Exchange, under the ticker symbol "ISE."  Although the IPO priced at $18/share, the stock's first public trade crossed at $26/share, and shares quickly rose to the $30 level.  That strong performance put ISE in elite company: Since 2001, only thirteen IPOs have risen more than 50 percent on their opening day of trading.

As of Tuesday, March 15, shares were holding steady at $29/share, up more than 60 percent from the original IPO price. 

Exchange Firing on All Cylinders 

The strong IPO is just the latest in a long line of successes for the NYC-based ISE.  The exchange only opened for business in May of 2000, but its leadership in the field of electronic trading has helped it transform an industry and rapidly gain market share at the expense of its blue-blood rivals: the Chicago Board Options Exchange (CBOE), the American Stock Exchange (AMEX), and others.  ISE is now the market share leader in the options industry, with just over 30 percent of all options contract volume; CBOE remains the dollar value leader, as it dominates some of the more valuable options contract listings.

"Market share is just a by-product of what we do, but what we really stress is customer service; providing customers with the best tools ... quotes, liquidity and the lowest cost," said David Krell, ISE's president and CEO, in an interview with Reuters.

ISE was the first exchange to offer fully electronic options trading, upsetting decades of tradition and threatening the existence of one of the greatest symbols of American capitalism - the fabled "options pit."  The speed and efficiency of electronic trading has reverberated throughout the industry, however, and today, all of the exchange have either embraced electronic trading or are moving rapidly in that direction.

A Trend Towards Public Exchanges

ISE's successful debut points towards an important trend in the securities industry - the move towards for-profit, publicly traded exchanges.  Previously, securities exchanges were run as private "clubs," whose members were granted the right to buy and sell securities.  Many were run as non-profit institutions.

But that tradition has changed dramatically over the past few years, as entrepreneurial upstarts like the ISE have forced the established exchanges to adopt more efficient, business-like attitudes.

The Chicago Mercantile Exchange (CME) paved the way in 2002, when it successfully transitioned from a privately held non-profit organization into a public-traded for-profit company.  Investors have embraced the move, as the exchange capitalized on rising volume in the derivatives marketplace: After debuting at $40/share in late 2002, shares have skyrocketed, and were recently trading hands for $200/share.

Similarly, the NASDAQ recently achieved a full public listing under the ticker symbol "NDAQ," and the NYSE is contemplating a transition to "for-profit" status.

Fair Value?

Despite rising more than 60 percent from its IPO price, ISE does not appear to be overtly overvalued - at least compared to its publicly traded peer, the CME.

CME trades hands at 8.95X current revenues, which are growing at 11 percent/year.  The company trades at a price/earnings ratio of 30, and analysts expect the company to grow earnings by 14 percent next year.

ISE trades at a similar multiple to revenues: 8.6X.  Although no forward forecasts are available, the exchange has grown revenues by 25 percent or more for each of the past two years, and all signs point towards a solid year in 2005 as well.  The company is valued somewhat more richly on the earnings front, with a trailing price/earnings ratio of 41.  But again, earnings have been growing quickly at ISE - up 28 percent last year.

With options volume continuing to set records, expect interest in ISE shares to remain high.

 

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