SEC Scrutinizing Proximity Colo Business

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"As regulators, we at the SEC are mindful of the extraordinary technological advances and the benefits they have brought over the years," Schapiro said in her Tuesday speech (text here) at the SIFMA annual conference. "We'll seek input on high frequency trading and the wide range of strategies that may fall within this vaguely defined category. A related issue, on which we also expect to seek public comment, involves colocation — the process where exchanges allow some broker-dealers to place their servers in close proximity to the matching engine of the exchange.

"This could result in significant advantages, at least for certain traders for whom speed is of the essence," she added. "In the interim, we are making sure that exchanges offer these co-location services on terms that are fair and non-discriminatory and that are transparent to the public."

Big Business for Colo Firms
Wall Street firms using computerized algorithmic trading measure success in milliseconds and microseconds, which is how long it takes to connect to exchange systems to execute a trade. A microsecond is one-millionth of a second. Low latency trading has become a big business for a number of players in the data center space, especially Equinix (EQIX) and Savvis (SVVS).

The major players in low latency trading are making big investments in the space, which have made northern New Jersey one of the hottest data center markets in the country. The New York Stock Exchange is building a $400 million data center in Mahwah, New Jersey featuring exceptionally fast connection speeds and plenty of colocation space that it hopes to lease to traders. Savvis recently announced a major expansion of its financial trading hub in Weehawken, N.J., while the ability to gain additional data center space for trading firms was a factor in Equinix' decision to acquire Switch and Data for $689 million. Switch and Data opened a major new facility in North Bergen last year, while Equinix is expanding its huge data center operations in Secaucus.

No Chilling Effect Seen
Executives of Savvis said yesterday that they haven't seen any chilling effect from the SEC's interest in high-frequency trading and proximity hosting. "We’re not seeing the current regulatory discussions having an impact on demand for the services we offer," said Bill Fathers, the U.S. managing director for Savvis, in a conference call with analysts. Fathers said that new regulations could have several impacts. If the SEC tightens rules for colo services at exchanges like the NYSE, it could drive demand for Savvis and other third-party providers. "The potential negative might be if regulation drives some level of price control and regulation of price for providing those services," he said, adding that it was too early to know the ramifications of the SEC interest.

For additional coverage, see the Wall Street Journal, FinExtra and Securities Industries News.