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May 1, 2012

Adios Chicago

CBOE Moving Flagship Exchange Platform to New Jersey

By Peter Chapman

The Chicago Board Options Exchange, for competitive reasons and due to member demand, will move its primary options trading platform from Chicago to New Jersey in the fourth quarter.

The move of the matching engine to the Equinix NY4 IBX data center in Secaucus, N.J., will make the exchange the last major stock or options exchange to locate in a data center in the New York metropolitan area. CBOE already houses its all-electronic C2 options exchange and its stock exchange at the facility in Secaucus. The move later this year will also include CBOE's futures exchange and its OneChicago single-stock futures exchange. 

Ed Tilly, CBOE

Behind the move, which only impacts electronic trading on the exchange and not the floor operation, is a need to reduce latency for its members, a CBOE spokesperson said. But aside from the geographic benefit, the move will also allow for "some enhanced technology offerings," according to CBOE.

By reducing its members' latency, or the time it takes to trade or quote or receive market data, the move is expected to reduce trading costs for market makers and other high-end trading houses. That includes those firms who maintain a server at the CBOE and those mainly New York-based firms that lease high-speed lines between New York and Chicago.

"This makes trading cheaper for everybody," said Brian Donnelly, a managing member of New York-based options market maker Volant Trading. "It doesn't matter where they're based."

All the major firms, whether they are headquartered in New York or Chicago, maintain execution engines in the New York metropolitan area. That's because all of the major stock and options exchanges, except for CBOE, site their matching engines in the New York area. The trading houses co-locate the execution engines with the exchanges' matching engines to cut down on latency.

For latency-sensitive firms, it is imperative to co-locate alongside the matching engines. That's especially true for options market makers that base their quotes on the prices of the underlying stocks and exchange-traded funds, and hedge in the stock market.

Market makers on the CBOE can be at a disadvantage to those at the International Securities Exchange, for example, as they can't update their quotes as quickly. Because the securities industry's stock quotes are collected and published in New York, the CBOE must haul them the 800 miles out to Chicago.

That may impact brokers' routing decisions. If the CBOE quote is deemed to be lagging, a broker may pass over the exchange for one of the New York-based marketplaces.

Ed Tilly, CBOE's president and chief operating officer, told journalists in January that a major reason for the move was to benefit those market makers using the stock quotes from the New York-based exchanges to price their merchandise.