Merits of a West Coast Exchange

A few colleagues and I were speculating recently about whether or not some exchange operators might look to open a trading venue on the West Coast of the US. At first we were just joking about the possibility, but after thinking about it a bit more, why not?

The West Coast has not had a trading venue since 2005 when Archipelago Holdings acquired the Pacific Exchange and closed its California trading facilities for good. Since then, trading operations in the US have gravitated toward northern New Jersey and Chicago.

Yet it might be time to re-think this. Regional exchanges originally popped up due to geography—if you wanted to trade, you did so locally. After a while, as technology got better, it was easier for the larger exchanges to either run their smaller competitors out of business or outright buy them. Once all the markets went electronic, distance did not seem a major issue for traders.

However, as improvements in connectivity and software performance are now measured in microseconds, geography is once again a major issue. Researchers at the Massachusetts Institute of Technology (MIT) have been researching the concept of "geo-latency," or finding the optimal location to have the least latency between global markets, for a number of years now.

Imagine a new trading facility based in Oregon or Washington, where there is cheap power and proximity to the transpacific telecommunications cables. Combine that with being close to the energy markets in Western Canada, and this could be of interest to energy and commodities traders.

Exchange operators like the CME Group and the IntercontinentalExchange (ICE) would probably try to squash a startup exchange simply by opening a regional hub in the neighborhood. They would have more liquidity than a new exchange, but trade messages would still need to make the trip to Chicago and back, compared to just traveling locally.

Will a new West Coast exchange ever come off? I hope so. It's been ages since I've had an excuse to visit the Pacific Northwest.