December 20, 2011

As exchanges look to generate more revenues from colocation services provided in their liquidity centers, NYSE Euronext took steps to expand the scope of users of its colocation services in its Mahwah, New Jersey data center.

A regulatory filing dated Oct. 26, 20011 provides insight into NYSE Euronext’s plans to open up the Mahwah data center to third party application providers. The filing notifies the SEC of a proposed rule change by NYSE Arca, one of three U.S. equities matching engines housed in the Mahwah data center.

On October 11, 2011, NYSE Arca filed a notice with the Securities and Exchange Commission requesting to expand the scope of users for colocation services in its Mahwah data center, to include vendors. Previously, the only users of colocation services were electronic trading permit (ETP) holders and sponsored participants. But under the proposed rule change, users could include non-ETP Holder broker-dealers and vendors.

“The exchange anticipates that the potential additional users would provide, for example, hosting, service bureau, technical support, risk management, order routing and market data delivery services to customers while the user is co-located in the Exchange’s data center.”

In the filing, NYSE Arca also proposes to amend its fees for colocation since the vendors would provide hosting for hosted user inside the colocation facility. From the filing, the exchange proposes to charge a fee of $500 per month for each hosted user (end customer) that the user (vendor) hosts in the exchange’s data centers. This sounds like the vendor will need to pay $500 per month for each user they are hosting in the colo facility. Beyond this, the vendors would charge their customers fees (set independently) which the exchange would not share in.

While the filing has some confusing language around the terms User and Hosted User, it defines "hosting"as supporting the end user's technology, either hardware or software in the user's co-location space. Evidently, vendors will need to pay to be in the colocation space and naturally, end users (presumably brokers, market makers, and hedge funds and possibly, buy side firms sponsored by member firms), will pay fees to the vendors as well as to the data center for renting colocation space.

One can quickly see how colocation is shaping up to be a lucrative business for exchanges.

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Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in ...