The CFTC's Co-location Proposal: Not Ready for Prime Time

By | June 17, 2010

Also posted at TabbFORUM.com

The CFTC should stick to regulating markets and not try to regulate data center providers.  The recently released proposal by the CFTC does a good job of preventing providers of data center space from competing on their merits and pricing according to market demand.  Don’t get me wrong, I appreciate the spirit of the proposal –make pricing transparency and allow “all qualified market participants willing to pay for the services” to gain access.  However, the wording leaves me wondering how some providers could stay in business.

All “that offer co-location and/or proximity hosting services must ensure that there is sufficient availability of such services for any and all willing and qualified market participants.”

This sound reasonable.  If someone wants in and can afford it, they should be allowed access.  The validity of the statement is killed in the next line, however: “if the availability of a service became limited, thereby leaving some market participants or third-party hosting providers without adequate access, the Commission would not view access to those services as open and fair.” So does that mean if Equinix, CME or NYSE runs out of space in their data centers they will be out of compliance until they can build out new real estate?  Data centers are not virtual assets; they cannot be expanded at the push of a button.  Despite a huge push to increase the inventory of prime data center space in major market centers square footage and more importantly the power to support is very much finite.

Next:

The provision relating to ‘‘Fees’’ would ensure that fees are not used as a means to deny access to some market participants by ‘‘pricing them out of the market.’’

What happened to supply and demand?  Isn’t that what a capitalist society is based on?  If trading firms are willing to pay $10,000 per server cabinet and the provider can sell enough of those cabinets to stay in business, then there should be no issue.  Only a few paragraphs’ prior in the proposal, it states that “equal access” means providing services to those “participants willing to pay for the services.”  A good portion of trading firms in the US do not use trading strategies with enough latency sensitivity to make paying the premium for co-location necessary or a worthwhile business expense.  And of those, many can in fact afford it but don’t need that access – a.k.a., they are not willing.

By all means, the CFTC should encourage all co-location providers to disclose pricing and availability, but let’s not mess with the supply and demand economics that make the US capital markets some of the most efficient in the world.

I could go on, but I think you see the problem here.  Time for the CFTC to go back to the drafting board.

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