Last night, executives from four competing traditional and electronic exchanges -- BATS, DirectEdge, Nasdaq and NYSE -- sat together for a mostly friendly and good-natured debate on high-frequency trading issues such as colocation and flash orders, hosted by Aite Group.All agreed that colocation is simply a matter of evolution, the need to overcome the latency caused by geographical distance. "Every 100 miles is a millisecond of delay and colocating servers equalizes that time, providing fair access to our data center," said Joe Mecane, executive vice president and CAO, U.S. Markets, NYSE. As most people know by now because it's been covered to death in the press, NYSE is building a 400,000 square-foot data center in Mahwah, N.J. that will allow all its matching engines to reside in the same place, alongside NYSE's colocation customers. "Exchanges have historically used third parties for colocation, this we'll run ourselves," he said. To those who feel that firms that colocate have a market advantage over those who don't, Mecane noted, "People will choose to invest [in colocation] or not." Although the data center NYSE has under construction is bigger than the others, it's not fundamentally different from anything else on the Street, he said.
Brian Hyndman, senior vice president, Nasdaq transaction services, said that his exchange believes colocation is a good thing, "otherwise it would be an unlevel playing field for those in Dallas and San Francisco." He noted that Nasdaq has a data center leasing arrangement with Verizon, also in a New Jersey location, where it keeps four of its matching engines.
Colocation has existed for years, noted William O'Brien, CEO of Direct Edge, from the days when trading firms on the NYSE floor wanted their booths to be in certain locations so that their order-ferrying runners wouldn't have to run too far. "People should be allowed to make investment decisions," he said, echoing Mecane's earlier comment. "Equality of access is a core component of investor confidence. But where firms are and what they pay should be transparent, published information." Direct Edge has a partnership with colocation facility provider Equinix and uses its facility in Secaucus, where ISE and Arca are also located.
The exchange honchos all found common ground on the competitive pressures they face and the need to provide low-latency services. They agreed that any merger between the SEC and the CFTC should be handled with care, and that risk management rules need to be in place so that a problem in a colocating firm's applications couldn't cause failure across an exchange's data center.
A bit more contentious, naturally, was the issue of flash orders - quick sneak peaks of orders appearing in other venues that some traders can access. In recent months, the NYSE complained in a letter to the SEC about the electronic exchanges' flash order programs and BATS and Nasdaq withdrew their flash order offerings. Direct Edge has persisted with its Enhanced Liquidity Program, which includes flash orders.
Mecane defended the NYSE's letter, saying "it was intended to refocus the SEC on the way the market structure was developing. We felt we would be forced to compete." The backstory here is the SEC has already forced NYSE to stop allowing its specialists to see every order as it comes in. "That made us look at whether the market structure is going the way the SEC wanted," he said, but also noted that flash orders got improperly pulled into the high-frequency trading debate.
"Market structure has to evolve," responded Jeromee Johnson, vice president market development, BATS Exchange. "Options exchanges can now offer flash orders."
And O'Brien, staunch defender of the flash order said, "Differentiated market participation is not necessarily a bad thing. It needs to be part of the bigger debate."