Nasdaq has been forced to suspend its high-speed trading function after accusations that it is giving select colocation clients access to lower-latency hollow-core fibre cables.
This is in violation of the SEC’s rule-filing process and the Exchange Act, and is promoting anti-competitiveness, according to a letter to the SEC from high-frequency trading firm McKay Brothers.
In the letter, McKay Brothers noted that Nasdaq was surreptitiously providing hollow-core fibre upgrades to certain clients, for a US$10,000 additional monthly fee. This option was not included in any of the exchanges regulatory filings.
“Several market participants were as surprised as we were to learn that Nasdaq covertly provides select market participants with such a latency improvement option,” McKay Brothers stated in its letter.
“[We] urge either a rule filing with respect to the hollow-core fiber offering or eliminating such offering (and any other undisclosed latency advantages) for all customers. It is extremely frustrating to periodically learn of yet another means by which Nasdaq provides hidden latency advantages to select market participants.”
Nasdaq confirmed that it is halting the provision, stating: “In close consultation with the regulator and our clients, Nasdaq has begun discontinuing the service.”
Colocation (CoLo) customers have servers and equipment running within Nasdaq’s data centre, stored in high-density cabinets. This facilitates lower latency and more efficient connectivity to Nasdaq markets.
Plans to expand the NY11 data centre and establish fees for the larger CoLo service were filed with the SEC in November 2024. The initiative was driven by greater demand for power and cabinets, Nasdaq said. The ultra-high density cabinets included in the expansion have a power density between 10 and 15 kW. They will be exclusively available in the NY11-4 centre due to the power distribution they require.
Nasdaq’s SEC filings outlined its intentions to establish a monthly fee for ultra high-density cabinets, an installation fee for cabinets in NY11-4, and power installation and distribution unit options fees.
The exchange assured that “Nothing in the proposal burdens intra-market competition because the Ultra High Density Cabinets, cabinet power options, and protocol data unit (PDU) optionality in NY11-4 are available to any customer under the same fees as any other customer, and any customer that wishes to order cabinets, power and PDUs in NY11-4 can do so on a non-discriminatory basis.”
Reserving an option on space in the expanded facility would cost US$1,000 to US$1,500 a month, the filing said, depending on cabinet density. The hollow-core fibre connection available to some clients is priced at up to 10 times this figure, and has not been listed on any fee schedules.
In promotions of its CoLo service, Nasdaq states: “Many telecommunications carriers are available, providing subscribers with an opportunity to establish diverse connectivity to and from the facility at competitive prices.”
As part of an equalisation project, Nasdaq stated its goal of creating more equal access to its data campus for all telecommunications providers. However, this development signals an anticompetitive nature to the facilities according to McKay Brothers.
“Unequal connections across the colocation service space will compel many customers to establish a third point of presence,” its letter said. “Nasdaq has not denied that its customers face this costly predicament, nor has it denied that it currently profits from maintaining unequal connectivity within NY11 and that it has a profit incentive to delay connectivity equalisation at its data centre. The situation perpetuates and expands an unjustified, inappropriate burden on competition and unfair discrimination in exchange access and connectivity.”
McKay Brothers issued further complaints around the opacity of the equalisation project, stating: “The November 2024 Chicago event on the NY11-4 expansion and the Equalisation Project was by invitation only. It is unclear why this event was not open to the public and the Commission.
“The event followed many months of Nasdaq’s selective disclosure through confidential technical specifications to select market participants only. It is unclear to us if Nasdaq affiliates also gain an information advantage.”
Concerns of ambiguous language in the information that has been released about the project, including references to “fibre”, “cable” and “media”, were also raised by the firm.
“[This] leaves open the possibility for specialized types of fibre, cable, or media that could provide hidden advantages,” the letter stated.
“Given our experience with Nasdaq’s hollow-core fiber offering, we believe the lack of specificity is intentional.”
Whether Nasdaq has been providing latency advantages to clients by other means is now in question, McKay Brothers said, stating that “given Nasdaq’s persistent lack of transparency, they can no longer be granted the benefit of the doubt”.
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