NEW YORK (Reuters) – U.S. stock exchanges have put New Jersey on notice: Pass a financial transaction tax and they will relocate their primary data centers, where billions of dollars of trades are executed daily – possibly to Chicago.
A move to the Windy City wouldn’t just save millions in annual tax dollars. It could also help level the playing field for market participants by making lightning-fast price changes harder to exploit by high-speed traders and promote deeper liquidity, industry members said.
That’s because all 16 U.S. stock exchanges have their disaster recovery sites in the same building at 350 East Cermak Road in Chicago, as opposed to their main sites, which currently reside in three data centers spread across a 50-mile swath of northern New Jersey.
In the electronic trading world, the physical distance a signal must travel is a key factor in how long it takes to get an order filled, and the race to get the best prices is one in which nanoseconds matter.
Moving to the Chicago site would reduce the possibility for latency arbitrage, where firms detect a trade on one exchange and then use microwave or laser technology and sophisticated algorithms to race to the other exchanges, executing trades and booking profits before those exchanges can update their prices.
“A lot of investments in fast infrastructure would become obsolete and a lot of trading strategies on that side would be eliminated,” said Jack Miller, head of trading at Robert W. Baird & Co.
Reducing latency arbitrage would make it easier for market participants to complete trades at their desired price, said a senior exchange executive who was not authorized to speak publicly on the matter. That would encourage larger displayed trade sizes with tighter spreads between the price at which an asset is being