Nasdaq OMX, at a time of intense suspicion surrounding high-frequency trading practices, has consented to allow the Securities and Exchange Commission to regulate its co-location services.
"We have been asked by the SEC and consented to–indeed embraced–their regulation of our co-location business," Eric Noll, a Nasdaq executive vice president in charge of transaction services, told Traders Magazine. "Their goal is to make sure that access to our marketplace is fair. That is also our goal."
As part of the new regulation process, Nasdaq will submit any pricing changes to the SEC for approval, Noll said.
The move comes at a time of increased fear and scrutiny of high-frequency traders, the group most closely associated with the placement of trading servers within close proximity of exchange matching engines.
Many believe the marketplace is developing into a two-tiered environment with fast-on-the-draw high-frequency traders having the upper hand. They believe that co-location confers unfair advantages upon high-frequency trading firms.
Co-location is a service offered by market centers and third parties, such as Equinix, that involves making rack space available to firms for their trading servers in facilities near market centers’ matching engines. Placing one’s trading server nearer to an exchange matching engine reduces communication times, increasing the chances of beating competitors to profitable trading opportunities.
Many of these data centers are in New Jersey where NYSE Euronext is building a 400,000 square foot facility for co-location purposes.
Because of the perception of unfairness, some in the industry have argued more transparency into the allocation practices of exchanges’s co-location business is warranted.
"Let’s get it out in the open," Bryan Harkins, an executive with DirectEdge ECN, said at last month’s Traders Magazine conference. "What does it cost to get a rack? How do I get a rack? Make it transparent. List fee schedules and membership costs."
At least one high-frequency trader is in the same camp, but believes regulation would be sensible. "Exchanges are very fair in how they allocate space," Richard Gorelick of RGM Advisors said at the same conference. "A regulatory structure around that would be helpful to make it clear that nobody is getting an unfair advantage."
Noll contends a regulated co-location business is better than no co-location business. If the SEC decided to ban exchange operation of co-location facilities, then unregulated "wildcat operators" would step in to offer it. "They would be unregulated and would not ensure fair access," he said.
"Co-location is not going away," Noll added. "But the way the market is evolving is positive. Exchanges are providing it and it’s regulated and access is fair."
