Russell 2000’s Move and the Importance of Location

[This post was written by Steven Givot, SVP of Strategy and Product Management at the Chicago Stock Exchange (CHX)]

Location has always been key in our industry. Back in the day, when exchanges operated a open outcry trading floor, most of the institutional and retail orders sent to the exchange arrived at the trading crowd printed on paper. These orders provided proprietary traders two things: an opportunity to trade and additional market information. Each of these was of great value to an astute trader.

Traders in large trading crowds attempted to physically position themselves in close physical proximity of a broker representing considerable orderflow to maximize the likelihood of trading against and obtaining information from those orders. I recall times when traders would arrive more than an hour before trading began to mark their place to stand in a trading crowd — almost always near an executing broker with significant order flow.

In today’s electronic trading environment, the desire for proximity has morphed into a desire to locate a proprietary trading firm’s servers in close electronic proximity to exchange matching engines. The fees charged by some exchanges for co-location services reflect the demand for proximity.

Next month, trading in futures (and options on futures) based on the Russell 2000 index is scheduled to move from ICE’s datacenter in New Jersey to CME’s datacenter in Illinois. This change relocates the trading in these contracts about 800 miles.

This relocation will affect trading strategies in these contracts and in securities which are derivative of the Russell 2000 index. Arbitrage opportunities between the future contracts and the derivative exchange traded products (ETPs) take on additional risk when there is significantly increased latency between datacenters where the futures contracts and ETPs are traded.

CHX routinely matches orders in more than 70 ETPs at the CH2 datacenter, which is less than 40 miles from the CME datacenter. The latency between these two datacenters is about 5% of the latency between the CME datacenter and datacenters in northern New Jersey.

Proximity of one sort or another has been an important component of trading success since my days on trading floors 40 years ago. Quick access to market information — whether verbally across a trading crowd or electronically between datacenters — continues to be of great importance. Technology has modified the way we get information, but the need for the timely receipt of information remains unchanged.

One way to assure that you will receive timely information about price changes and trades executed in futures contracts underlying the leading ETPs is to place orders and execute trades for those ETPs as close to the futures market as possible. CHX’s matching engines at CH2 in Chicago are 20 times closer than any matching engine located in New Jersey.

With the move of the Russell 2000 index contracts from New Jersey to CME (Illinois), CHX will relocate matching of 27 ETPs from New Jersey to Illinois — including all ETPs based on the Russell 2000 index. Now would be a good time to consider relocating some of your futures/ETP trading from New Jersey to Chicago — where latency is minimized and opportunity is maximized.

Need more information on how or why to make that switch? Feel free to reach out to me at s1givot@chx.com.