The announced NYSE (NYX)-Deutsche Boerse (DBOEY.PK) merger will create the world's largest exchange for stocks and derivatives – and will represent both a risk and an opportunity for both companies' data center partners.
According to the official press release issued by the two companies, the merger is expected to produce synergies quantified in the hundred millions:
The combination is expected to generate annual cost savings of some EUR 300 million/US$400 million, principally from information technology, clearing, and market operations, as well as from corporate administration and support functions.
Let's try to analyze the two companies' approach toward their data center operations to understand if these synergies might also include some kind of rationalization.
Apparently, NYSE and Deutsche Boerse are following an opposite approach when it comes to their operations. In 2010 NYSE opened its 400,000 square foot data center in Mahwah, N.J. The center is composed of 20,000 square foot pods that are built on an “as needed” basis. NYSE is also selling colocation space to trading firms seeking high-speed access to the matching engines, thus becoming, apparently, a competitor to Equinix (EQIX), Savvis (SVVS) or TelX.
More details are available from NYSE magazine:
The new data centers, which are expected to be fully operational in 2010, are planned to support several billion daily transactions and quotes. NYSE Euronext plans to use 20 percent of the compute space for its own systems and to commercialize up to 80 percent for market participants.
If we review the data released by Equinix at its 2010 analyst meeting, it looks like this decision had a limited impact on the company's success in the financial vertical:
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The financial vertical, which now represents about 22% of Equinix's annual sales globally, is one of the company's fastest growing segments, having experienced a 46% YoY increase in 2009 and a similar trajectory in 2010, as bookings in Q3 2010 grew about 40% from the previous year.
NYSE is also partnering with the colocation providers it has just started competing with, as it expects to open as many as 40 "liquidity hubs" in partners data centers around the world, according to The Wall Street Journal:
The "liquidity hubs" will offer market connections and technology services to local banks and trading firms, building upon the two proprietary facilities the Big Board parent launched to house its own trading systems.
"This is a springboard from the two data centers that we own to create other points of presence at destinations of importance around the world," said Stanley Young, chief executive of NYSE Euronext’s technical services arm, NYSE Technologies.
Some of these hubs may already be in service. NYSE, for example, operates an access point to its Secure Financial Transaction Infrastructure at an Equinix facility in Chicago; this site will most likely become one of these liquidity hubs.
Some of the other targeted markets are Frankfurt, Lisbon, Paris and Milan in Q1 2011, and Sao Paolo, and Toronto in Q2. Tokyo, Hong Kong and Singapore are other potential markets for later deployments.
NYSE took a similar approach in Europe, where it built its Basildon, England, data center, another 400,000 sq. ft. facility, which may be completed in different phases.
The total investment made in the two facilities was about $ 500 million.
However, after the opening of its European facility, NYSE also announced a partnership with Interxion (INXN):
Interxion, a leading European provider of carrier-neutral colocation data center services, today announced a strategic partnership with NYSE Technologies, the global commercial technology unit of NYSE Euronext and the world's leading provider of end-to-end electronic trading solutions.
The strategic partnership builds upon NYSE Technologies’ use of Interxion as a provider of data centre space to house several network access points for its pan-European and Asian trading network, the Secure Financial Transaction Infrastructure® (SFTI®).
Stanley Young, CEO of NYSE Technologies said, “Interxion have moved from being a trusted vendor to a strategic partner and we are delighted to use their data centre in the City of London to roll out a range of reliable, cost effective and low-latency trading, data and connectivity applications to a wider range of customers. The data centre is ideally located to achieve low latency access to a number of other venues and is the closest SFTI access centre to our new European Liquidity Centre in Basildon. This enables us to offer hybrid solutions both within our own facility and also at this prime location for customers wanting to reach other venues.”
Bottom line, it sounds like this is not an “all or nothing” business but a situation where different approaches/providers live together, in spite of NYSE's big commitment toward building its own data centers.
Deutsche Boerse took a completely different approach, and went for outsourcing its data center operations:
Deutsche Börse Systems, the IT division of Deutsche Börse Group, and Equinix, Inc., a provider of global data center services, today announced the completion of a strategic data center services contract, which will both increase data center capacity and improve execution times for algorithmic traders located in Frankfurt. From 2011 onwards, Equinix’s FR2 International Business Exchange™ (IBX®) data center, will serve as the new main data center for Deutsche Börse Group in Frankfurt, where electronic trading platforms will be deployed and acting as the central colocation site for customers of Eurex, the international derivatives exchange, and Xetra, the cash market within Deutsche Börse Group.
Data Center Dynamics has a very interesting comment on the matter, in an article by Ambrose McNevin published on February 17:
With one large, brand new data center sitting in Basildon, UK, and another sitting in Mawhah, Northern New Jersey, realising the potential of those assets would be top of the agenda for any merged company.
One question is: could the Frankfurt Stock Exchange be run from Basildon?
When asked, James Dow, CTO at CST Technology, said: “One could run the Frankfurt Stock Exchange from Basildon, the question is, do you want to? To date Deutsche Boerse and NYSE have fundamentally different approaches. One laid off risk in favour of a partnership approach, through its deal with Equinix. The other, NYSE, onboarded risk to play in the colocation business. Deutsche Boerse does not have anything equivalent to Basildon, a shining palace on the hill. The question is: does the merged entity sell Basildon to someone like Equinix and move into Frankfurt. Where do I concentrate liquidity? It makes sense keeping derivatives and cash equities close together. Another question is: what is the compelling value to a market operator to own real estate?”
Dow says that should something like a sell off happen and Basildon and Mahwah become third party independent assets, then it would truly be a game changer.
Where do we go from here?
The fact is that the only people who know are sitting around the board tables at NYSE and Deutsche Boerse but with $400m in annual savings planned and IT earmarked to deliver it, whatever happens, we are talking about change at a data center scale.
While the combined NYSE-DB company addresses these problems, Equinix keeps increasing its customer count and interconnection business among its participants to the financial exchange: 
On February 16, Equinix also announced a new service for the U.S. financial vertical, the Business Continuity Trading Room:
Equinix, Inc., a provider of global data center services, today announced the availability of its Business Continuity Trading Room (BCTR) services in Equinix’s NY7 International Business Exchange™ (IBX®) data center. Financial companies in the New York IBX now have access to resilient colocation and business continuity services for mission critical trading infrastructure.
The NY7 New Jersey IBX is the former Switch & Data (SDXC) center, a 163,537 square feet facility that now finds a way to differentiate its offering from the close by Secaucus NY2 and NY4 financial hubs hosting most of the exchanges residing in the Equinix New York metro centers.
Disclosure: I am long EQIX.
