As exchanges look to expand their liquidity centers to offer more services to customers, colocation is becoming a regulated business, according to exchange officials, who said they have submitted filings to their regulatory bodies outlining their policies.
But the practice of colocation has been controversial since there is a perception that big market participants could jockey for position and get closer to the matching engine than other customers inside the data center.
However, leading exchanges operating their own liquidity centers contend that everyone in the data center has equal access to the matching engine.
CME's Chief Operating Officer Bryan Durkin says the CME's new 428,000 square-foot collocation facility in Aurora, Illinois is open, accessible and non-discriminatory. "Everybody has the same access and opportunity to avail themselves," he asserts.
"So no matter where you are situated in the data center, your access point is not going to give you favored treatment over someone else," Durkin says.
CME worked closely with the Commodity Futures Trading Commission (CFTC), Durkin explains "to establish our operating policies and procedures in terms of the facilities themselves, and the mechanisms for accessing those facilities," says Durkin. "The criteria is clearly spelled out in terms of who may access, so that everybody is ... treated on a level playing field," he says.
Some big players built their own data centers to house their matching engines and they regard this as a competitive advantage over using a third party data center. NYSE Euronext has a 400,000 square foot facility with collocation services in Mahwah, N.J.
"By creating our own liquidity center we're able to treat all of our customers equally," asserts Jerry Capaci, vice president, SFTI & Colo Americas at NYSE Technologies. "If we were working through someone else, we wouldn't be able to maintain the standards for reliability, latency performance and security that we do now." NYSE Euronext has had to create regulatory filings with regards to allowing application vendors into its data center. "They are filed and we have to run our business that way," says Capaci, who adds the company sees this as an advantage. "There is a certain amount of transparency and security in that."
In a third party data center, Capaci contends the customer could pay a premium so they can sit next to the matching engine. Then that customer will have an edge over another customer sitting on the other side of the data center, which has to cross-connect to the matching engine.
"That's a disadvantage for a smaller customer, who couldn't pay that premium," notes Capaci. "That's not the way we operate. Whether they're small members or the largest financial services firm, they're all going to be treated the same," says Capaci.
For customers colocated in NYSE Euronex's Mahwah data center, every customer gets access to the same network latency. "That's something that's not possible to manage in a third party environment," he says.
Exchange officials at Nasdaq OMX, which runs a data center in Cartaret, New Jersey, are also sensitive to concerns about equal access. "We use equidistant cabling to ensure that everyone has the same latency away from the match engine," says Stacie Swanstrom, head of access services at Nasdaq OMX. 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 the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio