All roads lead to Bergamo: Euronext eyes new home for its tech

Market participants fear a “horrible” relocation project and more room for latency arbitrage

Basildon, a grey industrial town about 48km from central London, may not bring to mind trading in stocks and listed derivatives, but for the past 10 years, it has been home to the technology underpinning exchanges around Europe.

That may be about to change as Euronext – which operates venues in Amsterdam, Brussels, Dublin, Lisbon, Oslo and Paris – is considering moving its data centre to Italy. 

While a segment of Euronext’s market-making members would be happy to leave the expensive Basildon site, many others worry about the costs and effort of relocation.

“Moving a data centre with lots of different clients and lots of different users is daunting,” says an executive at a proprietary trading firm that makes markets on Euronext.

There are also concerns about fragmenting Europe’s exchange infrastructure even further, which could create more opportunities for high-frequency traders to engage in so-called latency arbitrage – a controversial strategy.

“Increased latency arbitrage opportunities will result in widening of spreads by liquidity providers, which ultimately will increase costs for all participants,” says an industry source.

Data centres are the lifeblood of exchanges, housing their matching engines and market data systems. To speed up the connection to a venue, market-makers typically place their trading systems in the data centre used by the exchange – a practice known as co-location.

In October, the London Stock Exchange Group (LSEG) agreed to sell Italian stock exchange operator Borsa Italiana to Euronext. In a subsequent note to shareholders, Euronext said the combined group would analyse the feasibility of transferring Euronext’s data centre to Milan by 2024, when the contract with its provider in Basildon will expire.   

Although the potential relocation is outlined in a public document, not everyone has picked up on the news. Four sources Risk.net spoke to were not aware of the plans.

New life in the sun

According to three sources with knowledge of the move, the new location under consideration by Euronext is not in Milan proper but about 50km from the city, in Ponte San Pietro in the Italian province of Bergamo. The province is home to a ‘Tier 4’ data centre, considered very reliable, and which is large enough to house Euronext’s operations.

Euronext declined to provide further information on the potential move from Basildon beyond what is contained in the note to shareholders. But sources point to a host of reasons why leaving the UK site makes sense for Euronext.

For one, many of the users of the Basildon data centre, owned by Ice Data Services, complain that it is costly to lease (see box: Swings and roundabouts). That has garnered some support for the move among Euronext’s market-making members.

An executive at a vendor of low-latency technology gives further reasons for Euronext’s plans: “They want to have united operations and Borsa Italiana doesn’t want to move because, presumably, the Italian government says so. They want to be inside the European Union given Brexit. And Ice is very expensive.”

There is historical precedent for intervention by the Italian authorities. Four sources say the LSEG’s transfer of Borsa Italiana’s data centre back to Milan from London in 2012 was prompted by pressure placed on the UK operator by the Italian government.

A person at a trading software vendor says this time the Italian government is insisting Borsa Italiana’s data centre remains in Italy, meaning that a combined data centre once the integration with Euronext is complete will also have to be based in Italy.

An employee of another trading software vendor says Euronext’s desire to leave Basildon goes back even further as it was already voiced by the firm’s former management.

That comment is echoed by a former employee of a proprietary trading firm that makes markets on Euronext, who says: “Even before the Borsa acquisition, they wanted to remove their dependency on Ice.” He adds that early last year he heard that the exchange operator was also eyeing Amsterdam and Paris as possible alternatives.

The Italian finance ministry has not responded to a request for comment on the allegations that it has played a role in Euronext’s relocation plans.

Costs of moving

Despite the benefits of leaving Basildon, the move would come at a cost to Euronext’s co-locating users.  

“Data centre moves are horrible projects for everyone,” says the executive at the low-latency technology vendor. “So that’s why you don’t see too many of those. It will probably take two years to announce and prepare everything.”

The former employee of the prop trading firm, who specialises in trading technology, explains that relocation would require buying duplicate equipment for the new site. It would not make sense to physically move existing equipment from Basildon because that would incur trading downtime as the move was carried out.

Firms would then have to install various software on the equipment in the new location, including systems for client reporting, margin calculations and payments, and risk management, the person says. He estimates that the costs of relocation would range between €500,000 ($607,000) and €2 million.

He adds that if the costs of moving outweigh potential profits, a firm may simply stop trading certain strategies and that the costs may be justified only for bigger market-makers. In Stockholm, for example, only local Nordic and large European market-makers can justify the costs of establishing co-location servers to connect to the relatively small market run there by Nasdaq.

“It is very prohibitive to build optimal set-ups in many different locations because you spend a lot of money. There is a bit of a burden and a [revenue] threshold where this makes sense,” the trading technology specialist says.

The person at the trading software vendor agrees: “It’s a significant project for all the members who are co-located, for sure.”

Arbitraging the distance

A broader implication of the move from Basildon to an Italian site is creating significant latency between Euronext’s new data centre and those of other exchange operators that cluster around London.

For example, Cboe Europe uses a data centre relatively close to Basildon: 119km away in Slough, on the other side of London. That distance with Euronext’s data centre will increase to around 1,300km if Euronext relocates to the Bergamo province.

Likewise, the LSEG has a data centre in London for Turquoise, a trading venue for European stocks. Both of Euronext’s rival exchange operators list Euronext securities, supported by the two data centres.  

“There are so many exchanges around London you basically have the minimum of latency [between venues],” says a second industry source. “If you move the Euronext site out to Bergamo, Italy and leave the rest of the world in the UK, you obviously create latency.”

The latency matters because it allows high-frequency traders to engage in latency arbitrage – a practice that exploits super-fast access to market information. For example, when a stock price moves on one exchange, arbitrageurs will dash to another venue where the price of the same stock has not yet moved in line, to buy or sell the security at a profit.

Opinions differ on whether latency arbitrage is good for the market.

Critics say the practice causes market-makers to widen their bid and ask quotes to account for the losses they may incur if high-frequency traders swoop in before they are able to align their offers with other venues.

“I don’t think that connectivity technology or being very fast adds anything to the quality of the market,” says the executive at the prop trading firm making markets on Euronext.

Like a number of other market participants that spoke to Risk.net, the executive would ideally like all of Europe’s exchanges to use a single data centre.

The first industry source says: “If all equity trading happened in the same data centre, then in some ways that is ideal because there is very little opportunity for latency arbitrage. The more fragmented it gets, the more opportunities open up for latency arbitrage.”

Swings and roundabouts

Many industry sources bemoan the high rents levied by the Basildon data centre, with the executive at the low-latency technology vendor even describing it as “the single most expensive place”.

Risk.net has attempted to do its own comparison between the site and other major data centres – not an easy task as co-locating fee structures vary between providers.

For example, Ice Data Services, which runs the Basildon centre, offers its trading members discounts for renting multiple server cabinets, as does the LSEG at its data centre in London. But the Equinix data centre in Frankfurt, which supports Deutsche Börse, does not mention such discounts in its price list.

The discounts for multiple cabinets can make the LSEG’s data centre cheaper than Ice once a tenant rents five or more cabinets. The LSEG also knocks 5% off for tenants that sign a two-year rather than a one-year agreement.

But for firms that are not trading members, such as vendors wanting access to market data, Ice’s cabinets are cheaper than the LSEG’s.

Out of the three providers, Equinix in Frankfurt charges the least for renting a cabinet. Its most powerful cabinet comes with a monthly price tag of £2,158 ($3,045) but it is less powerful than what is on offer at Ice and the LSEG.

Both Ice and the LSEG also levy one-off installation fees. Equinix has not responded to Risk.net on whether its Frankfurt site charges for installation.

Ice’s installation fees range from £6,000 to £10,000 depending on the cabinet’s electrical power, while the LSEG charges a single fee of £11,300 per cabinet.

The Bergamo data centre does not provide a public price list.

Ice declined to comment on the market perceptions that its Basildon data centre is among the most expensive.

 

Correction, February 24, 2021: The article has been updated to say that it is Cboe Europe that uses a data centre in Slough.

Editing by Olesya Dmitracova