Can High Frequency Colo Support Many Players?

connectivity

As NYSE Euronext pushes deeper into data center services, many industry-watchers are gauging the impact upon the market for low-latency colocation in Northern New Jersey. Colocation providers say the larger role for the NYSE and other exchanges will bring further segmentation to a fast-growing market, and predict that traders will continue to seek require colocation partners beyond the NYSE.

Securities analysts are keenly interested in whether NYSE Euronext's new data center in New Jersey will disrupt the status quo for providers like Savvis, Equinix and Switch and Data, which have invested heavily in large data center in north Jersey, supported by strong demand for high frequency trading.

"I don’t think this is a winner take all market," said Phil Koen, the CEO of Savvis (SVVS), in the company's recent earnings call. "I just don’t buy into that belief. I think you can have a bifurcation between what I’ll call exchange-captive centers and venue-neutral centers."

'A Lot of Activity Here'
"In the grand scheme of things, there is going to be room for the NASDAQs and the NYSEs and the Equinixes and the other players in this field, because there is a lot of activity here," said Equinix CEO Stephen Smith. "We have a very small percentage of this market. There are thousands of these companies looking for places to deploy this gear. And so we just don't see any impact on that, specifically from the New York Stock Exchange."

Wall Street analysts aren't so sure. Although the NYSE's colocation offering will be more expensive, its cutting-edge network will offer some of the fastest connections in a speed-hungry industry.

"According to our industry checks, the new NYSE Euronext data center is increasing competition in the financial services markets," said a recent research report from Mark Kelleher and Aron Honig at Brigantine Advisors. "Customers are researching the new product and it appears to be causing hesitation within the customer base.

"While speed is a factor, our checks are indicating that the NYSE is charging 3-7x what Savvis would charge for proximity hosting," the report added. "Are the microseconds of speed worth the cost? Probably for the larger high speed trading firms, but it will not be for less active traders."

Low Latency Arms Race in NJ
The accelerating arms race in high frequency trading is a major driver for the growth of the data center business in northern New Jersey. Equinix (EQIX) is building out the final phase of its huge NY4 data center in Secaucus, and has announced plans to acquire Switch & Data (SDXC), which is building out a financial data center in North Bergen. Meanwhile, Savvis has announced a major expansion of its Weehawken trading hub.

In its most recent earnings report, Savvis disclosed that two financial customers would be departing its Weehawken facility, but said it expected to replace them and emphasized the overall health of its high-frequency trading business.

"The fact of the matter is that we’re a real player and we have already a lot of gravity just by the way of whom we already have in that facility," said Koen. "So unlike a greenfield (data center) experience where you always have the 'chicken and egg' problem, we don’t have that."

Trading Ecosystem Has Value
Equinix, which specializes in peering, said its business model offered access to a huge ecosystem of connectivity providers and trading specialists.

"The network neutrality and network density that we have is a whole different proposition than what NYSE can offer to their end clients," said Smith. "You would have to ask NYSE how they're doing on their (customer) builds. But we are accumulating at a pretty rapid pace some very key trading venues, matching engines and execution venues that are going to be attracting lots of members coming in.

"We are watching all those activities pretty closely and quite frankly, I have seen no impact to the business to date," said Smith.