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NYSE, colocation providers battle it out on data center regulation

Mark Fontecchio

While previously in bed with data center colocation companies, the New York Stock Exchange now plans to start competing with its erstwhile hosting partners.

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NYSE Euronext is building out its own colocation services for financial clients and asking the federal government to more strictly regulate those colos with which it will soon compete. In a letter to the Securities and Exchange Commission (SEC) regarding an SEC review of the financial equities market, NYSE Euronext lobbied for the change.

"NYSE Euronext, which owns its own co-location space, is subject to the fair access requirements of the Securities Exchange Act of 1934," the letter states. "Third party data center operators, however, acting on their own or on behalf of market centers, are under no obligation to ensure fair access."

NYSE claims that as a result, not all markets are regulated equally and that creates competitive disadvantages. It wants the SEC to relabel a colocation facility as an exchange facility if the colo is working "on behalf of an exchange or in collaboration with an exchange," thereby subjecting it to the same regulatory requirements as exchanges.

NYSE tries to strong-arm on standards
The NYSE has built and is equipping a 400,000-square-foot data center in Mahwah, N.J., about 35 miles from Wall Street. It plans to use only 40% of the data center floor space for its own equipment; the rest will be designated for colocation.

I don't see any need for any type of regulation.
Jeff Paschke,
senior data center analystTier 1 Research

The benefits to hosting at a specific exchange are quicker access to market data and transactions. But some financial companies choose third-party data center providers such as Equinix because these third parties have access to multiple trading platforms rather than just, for instance, the NYSE.

Third-party data center colocation providers say their facilities provide hosting for multiple industries, not just the financial sector. And they argue that their ability to provide third-party hosting for multiple exchanges helps offset the benefits that exchange customers get by hosting their servers directly at the exchange.

"The New York Stock Exchange has opted to build out its own colocation facilities in New York and London," said John Knuff, the global business development director at Equinix. "Since their core offering is exchanges and they are granted licenses issued by the government, they operate under regulatory statutes and have to operate within a tight framework."

That tight framework includes transparency of pricing and details on how different kinds of customers are prioritized or located in the facility. Mainly, Knuff said, it's about fairness and transparency. Regulators want to ensure that no financial firm has an advantage over another within an exchange.

Though he hasn't yet explored the issue in detail, Jeff Paschke, a senior data center analyst at Tier 1 Research, doesn't think it's likely that NYSE's wishes will be granted.

"My thought is that there is very little chance that this could happen," Paschke said. "All colo companies, their facilities are basically open to all commerce, so I don't see any need for any type of regulation."

Equinix and Savvis, two major data center providers, have written letters to the SEC, arguing that extra regulatory requirements are unnecessary and would be burdensome.

In its letter, Savvis contends that "the potential impact on small business users of data centers of new and burdensome contracting requirements regarding access to co-location and low latency" is unfair to them and other third-party data centers, especially when many of their customers aren't even in the financial industry.

"Regulating data hosting site providers as 'facilities of an exchange' would be analogous to the Commission regulating landlords in lower Manhattan on the theory that many of their tenants are securities firms," reads the Savvis letter.

Knuff believes that NYSE wants more data center regulation to further its own agenda. He said NYSE wants its foot in the colocation door and has tried to grab any competitive advantage it can. Savvis agrees.

"They appear to be seeking to leverage their government-granted control over trading markets to muscle into the data site hosting business," the Savvis letter states.

Knuff was equally blunt.

"I think it's a very bold move," he said. "They're really trying to use regulators to fend off competition in the colocation space."

Mark Fontecchio can be reached at mfontecchio@techtarget.com.


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