Trading places

London's status as a major global financial center has given it a dominant grip over the trading of German stocks: The majority of firms trading shares on Deutsche Börse are actually based in the UK capital.

Shifting Deutsche Börse's trading platform from Frankfurt to NYSE Euronext's data center in Basildon, a town located roughly 50 kilometers (30 miles) east of London, would reduce trading times for the growing number of high frequency algorithmic trading firms that use computers to rapidly slice and dice orders to buy and sell shares.

'Momentum going to NYSE Euronext system'

"The momentum is going towards the NYSE Euronext system for the stock market," Reto Francioni, CEO of Deutsche Börse told the German business daily Handelsblatt, while "on the derivative side it is probably our system that will be used."

Moving the Frankfurt-based exchange's trading system to Basildon would also likely mean the end of Deutsche Börse's Xetra trading platform.

"If Deutsche Börse moves its shares trading platform from Frankfurt to London it will speed up trading for the majority of its market participants from milliseconds to microseconds," said Bob Giffords, a UK-based banking and technology analyst.

"In an increasingly competitive European market, where trading speeds are becoming ever more important, the rational behind such a move could be compelling."

Reducing financial risks of complex trades

A number of precedents for such a cross-Channel shift already exist. The Paris Bourse transferred its trading engine from the French capital to NYSE Euronext's Basildon data center in November 2010. The state-of-the-art site also hosts matching engines for the exchange group's markets in Belgium, the Netherlands, the UK and Portugal.

Giffords said market participants would obtain new trading opportunities if both Deutsche Börse and other NYSE Euronext stocks were traded on the same platform in Basildon.

"Putting everything together might deepen liquidity and offer some interesting new order types. It might also make it easier to 'hedge' positions across asset classes, thereby reducing the financial risks of complex trades," he said.

London is the key hub

"The majority of the customers of Deutsche Börse are based in London, so it would make sense to relocate the hardware to Basildon," one senior London-based trader told Deutsche Welle.

"Although the speed benefits would be negligible, the main beneficiaries would be high-frequency algorithmic traders," he said, adding that it was "possible" that Deutsche Börse's options platforms would stay in Frankfurt, as it remains the primary location for the exchange's options customers.

Deutsche Börse and NYSE Euronext both declined to comment on the statements made by Francioni in Handelsblatt.

Rapidly changing market

Atrium Network, a low-latency connectivity provider based in London, is part of a burgeoning industry of technology companies enabling computer-based traders to connect with exchange platforms at increasingly faster speeds.

Des Peck, head of marketing at Atrium Network, said: "The planned Deutsche Börse-NYSE Euronext merger is one of the many changes happening in the marketplace today, which present trading participants with challenges of where to connect, how to connect and on what platform."

The possible transfer of Deutsche Börse's trading platform to Basildon would be a major setback for Equinix – the company that had been selected to host Deutsche Börse's trading engines at a new data center in Frankfurt later this year.

Deutsche Börse's decision to move to Equinix's FR2 International Business Exchange (IBX) site was driven by demand from exchange participants, who want to install so-called "proximity hosting services" directly onto the servers hosting the exchange's trading engines.

Up in the air

Although observers say it would make sense for Deutsche Börse to transfer its trading platform to Basildon, it is unclear whether the planned merger between the Frankfurt-based exchange and NYSE Euronext will actually take place.

Antitrust authorities are examining the tie-up very closely and may yet veto the merger. There's also a risk that NYSE Euronext may pull out of the deal or choose another partner.

The Nasdaq market group and the financial house IntercontinentalExchange (ICE) launched a rival bid to take over the NYSE Euronext last week. Its offer of $42.50 (30 euros) per share was roughly 19 percent higher than Deutsche Börse's bid.

German newspaper Die Welt reported on Monday that Deutsche Börse did not see any need to improve its bid. It cited an unnamed source who said a bidding war would not be in the interest of the group's shareholders.

Author: Joe Morgan
Editor: Sam Edmonds