I can only speculate as to why the OCC Linkage Hub didn’t come to fruition but most likely at the core is self-interests, whether based on technical ideology or something more competitive.
The Past Baseline
During the 90s the equities markets had experienced a deluge of locked/crossed markets created by an onslaught of ECNs, which brought state-of-the-art technology to market, challenging the status quo as well as legacy technological infrastructure. Quickly these ECNs were able to show their prowess by delivering significant improvements in execution and data deliver speeds. ECNs were not beholden to Securities and Exchange Commission regulations, as were exchanges for some time, providing co-location services while working hand-in-hand with vendors and clients who wanted to be as close as possible to the ECN to capitalize on the benefits of faster data delivery and matching (Anyone remember “Greenies?”).
As the ECNs were spread out and the general market was still yet to catch up in perfecting distributed architectures, a natural transitional state of inefficiencies becoming efficiencies caused ever more locked/crossed markets. Even among ECNs you had quote arbitrage based on locations and superior/inferior technology.
Eventually the market became more efficient as ECNs upgraded systems, architectures became more efficient and the arbs slowly worked their way through the system.
The largest U.S. options exchange, the Chicago Board Options Exchange (CBOE), announced it is moving its main options matching engine into Equinix’s NY4 IBX sometime in the second half of 2012. The CBOE has been operating its all-electronic C2 options exchange in NY4 since 2010. The Boston Options Exchange (BOX) has publicized its move into Equinix’s NY4 IBX along with the International Stock Exchange (ISE). Both of these exchangesmade the move in 2010.
By moving to NY4, the options exchanges begin (began) to minimize, or eliminate at least, one component of what could be a cause to an industry wide problem and barrier to efficient free markets.
How do we know if Colo is helping the effort of Decentralized Linkage? If there is a way for these exchanges that are colo’d to come together to form a baseline to run regression analysis, they could surely show that they are not only taking the initiative seriously but also making progress (or not). They should be able to gauge variables among themselves (i.e., How many locked and crossed markets were created between my exchange and XYZ exchange prior to Colo vs. Post Colo?) If no change or limited change is found among one exchange, then that exchange can begin to look at other variables that run up their stack (i.e., Processing Power). Clients can also begin to optimize based on similar factors.
The co-location solution can quickly provide an equalizing factor in the areas of speed and bandwidth for options. Colo can provide options exchanges with the agility provided by Ethernet/Connectivity exchanges to cope with options message bursts, increase options traffic (non-burst), prompt OPRA trade reporting (squeezing the regulated response times) and quicker message delivery in general.
Tomorrow’s solution is here today. Colo is our friend!