By Alexander Osipovich and Joseph De Avila
The New York Stock Exchange is signaling that it will move its
electronic trading systems out of New Jersey if the state
implements a proposed tax on financial transactions.
The NYSE said Friday that it will run one of its exchanges from
a backup site in Chicago for a week as a demonstration of its
readiness to quit the state, according to a notice sent to
clients.
News of the NYSE's plan was earlier reported by The Wall Street
Journal. Two other exchange operators, Nasdaq Inc. and Cboe Global
Markets Inc., also indicated on Friday that they may quit New
Jersey over the tax.
Like many other exchange operators, the NYSE runs its electronic
trading systems out of data centers in northern New Jersey. Such
market operators have been concerned about a bill in the New Jersey
legislature that would impose a tax on firms that process large
quantities of trades in the state.
New Jersey Gov. Phil Murphy, a Democrat, supports the tax
proposal.
"We take this notion of taxing or some sort of toll on the
high-frequency trading very seriously," Mr. Murphy, a former
executive with Goldman Sachs Group Inc., said during a news
conference late last month. "It's something we're looking at with a
great deal of interest."
In an internal memorandum seen by the Journal, NYSE Chief
Operating Officer Michael Blaugrund said the exchange operator
could quickly relocate its systems to another state if the tax
passed. The memo linked to a news article about Gov. Murphy's
comments.
The NYSE memo linked to a news article about Gov. Murphy's
comments. In the memo, NYSE Chief Operating Officer Michael
Blaugrund said the exchange operator could quickly relocate its
systems to another state if the tax passed.
"To fully service our exchange members and their clients, and be
responsive to their concerns, we must prepare for a scenario in
which the proposed New Jersey law passes," the memo said. "This
preparation includes demonstrating our ability to move all of our
exchanges' primary matching systems out of the state."
To prove that, the NYSE plans to run the smallest of its five
stock exchanges, NYSE Chicago, from its backup site in Illinois
from Sept. 28 to Oct. 2, according to the memo and the notice that
the NYSE sent to clients.
The memo noted that the NYSE was also participating in a
previously planned, industrywide effort in which U.S. exchanges
will test their backup sites in the Midwest on Sept. 26, a Saturday
when the market is closed. Although such a test wouldn't involve
real trades, it "will exercise the industry's preparedness for a
potential wholesale transition out of New Jersey," the memo
said.
Rival exchange operators Nasdaq and Cboe echoed the NYSE's memo
in a pair of notices sent to clients on Friday. Both companies said
the Sept. 26 test would help ensure that they could quickly shift
operations to Chicago if needed.
Nasdaq cited financial feasibility as a possible reason for such
a move, while Cboe said it could relocate if staying in New Jersey
"would result in extra, unnecessary costs to investors."
Market operators such as the NYSE and Nasdaq use backup
facilities to help ensure market continuity if there are problems
with the primary data centers in New Jersey. Many of these backup
facilities are in Chicago.
The New Jersey bill would affect any firm processing 10,000 or
more financial transactions a year using electronic infrastructure
in the state. Such firms would pay a tax of $0.0025 on every
transaction they handle, including trades of stocks, options,
futures and derivatives.
That would almost certainly impact the NYSE, which runs a giant
data center in Mahwah, N.J., where more than a billion shares
change hands on a typical day. The NYSE is owned by
Intercontinental Exchange Inc.
Wall Street critics of financial-transaction taxes, such as the
one proposed in New Jersey, say they ultimately harm ordinary
investors because the costs of the tax are passed down from
exchanges, banks and high-speed trading firms to everyone else in
the market.
State Assemblyman John McKeon, the lead sponsor of the bill,
said in an interview last month that he proposed the legislation
because the state is "desperate for funds."
"If our state is blessed to have the geography that is able to
serve that function for the financial markets, then why shouldn't
we be in the position to potentially be paid for that?" said Mr.
McKeon, a Democrat.
New Jersey faces a shortfall of $5.63 billion for the fiscal
year that ends in June 2021, stemming from a drop-off in tax
revenue during the coronavirus shutdown. If approved, the tax could
generate billions of dollars of revenue for the state, Mr. McKeon
said.
Senate President Steve Sweeney, a Democrat and the top-ranking
lawmaker in the state legislature, also supports the proposal. But
it is unclear if it will pass this year. The governor said in his
August remarks that New Jersey can't rely on revenue from a tax on
trading to fix the state's current budget problems because he
expects exchange operators would sue to challenge the law if it
passes.
Mr. Murphy has proposed raising income taxes on millionaires and
making an expiring surtax on corporations permanent to help fill
the state's revenue shortfall. He's also called for borrowing $4
billion to balance the budget. State lawmakers must pass a budget
plan by the end of the month.
Write to Alexander Osipovich at alexander.osipovich@dowjones.com
and Joseph De Avila at joseph.deavila@wsj.com
(END) Dow Jones Newswires
September 11, 2020 15:00 ET (19:00 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.