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New Jersey trading tax battle's next frontier? A historic landmark in Chicago

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New Jersey trading tax battle's next frontier? A historic landmark in Chicago

SNL ImageThe Calumet Plant, a historic printing press in downtown Chicago, now houses a server farm that is a key part of U.S. stock exchanges' technology infrastructure.
Source: Declan Harty, S&P Global Market Intelligence

A historic printing house nestled in Chicago's near south side has been thrust into a standoff taking place 777 miles away between New Jersey lawmakers and Wall Street executives.

The R.R. Donnelley & Sons Co.'s Calumet Plant, which the Chicago Tribune in 1929 called the city's "most beautiful factory," lies at the corner of Calumet Avenue and Cermak Road. The red-brick Gothic industrial building looms eight stories high and occupies an entire city block, surrounded by hotels, restaurants and the arena where Chicago's WNBA team plays. Printers' marks still adorn the building's walls above the limestone wrapping around its lower levels, where rows of presses once printed magazines such as Time and Life, hefty Sears catalogs and Chicago telephone books.

But the printing presses have long since been replaced.

Cages of humming computers used by stock exchanges, trading firms and banks fill parts of the building today, with many acting as backups to the northern New Jersey data centers where billions of dollars' worth of U.S. equity trades are matched every day. New Jersey has long been home to the data centers that house the matching engines and router technologies behind modern-day trading, though industry experts say its proximity to the capital of American finance, New York City, matters little in today's high-speed markets. Now, a financial transaction tax proposal in Trenton is pushing Wall Street executives to consider moving their primary technical operations out of the Garden State and into other data centers around the country, including the old Calumet Plant in Chicago.

"You don't need to be next to New York anymore," said Vlad Khandros, global head of market structure and liquidity strategy and global co-head of principal investments and strategic ventures at UBS Group AG, who was speaking in an interview on behalf of an industry group, called the Coalition to Prevent the Taxing of Retirement Savings, which is fighting the tax. "It frankly doesn't matter where the servers are."

For weeks now, the Coalition to Prevent the Taxing of Retirement Savings, an industry group consisting of UBS, the Intercontinental Exchange Inc.-owned New York Stock Exchange, data-center operator Equinix Inc. and others, has been warning New Jersey lawmakers of the fallout it says a financial transaction tax would bring to the state as well as mom-and-pop investors across the country. That includes the industry's potential exit from the New Jersey data centers.

States including Illinois, Texas and Florida have already begun courting the financial industry by reaching out to several members of the coalition and detailing incentives they could offer, according to a person familiar with the discussions. Virginia has also been said to be under consideration as a landing spot.

In Illinois, the state recently passed legislation to offer data center owners and operators a 20% tax credit of the wages paid out to construction workers on certain projects in underserved areas. Texas currently provides a temporary exemption from its 6.25% state sales and use tax to qualified data centers. Data centers in Florida do not have to pay a sales tax or use tax.

To show New Jersey lawmakers the industry's mobility, trading firms simulated a normal trading day Sept. 26 using the Chicago data center at the 350 E. Cermak Ave. building as the primary location for the exchanges' matching engines. The coalition plans to conduct another test Oct. 24, "after which [it] believes its members will be prepared to efficiently and securely relocate data centers if New Jersey seeks to penalize the millions of Americans who rely on efficient markets for investments, savings, and pensions," the group said in a statement.

In addition to UBS, NYSE and Equinix, the group's members include Nasdaq Inc., Cboe Global Markets Inc., MEMX LLC, IEX Group Inc., Citadel Securities, Virtu Financial Inc., Credit Suisse Group AG and TD Ameritrade Holding Corp.

NYSE has gone further by running the smallest of its four U.S. equity exchanges from the Chicago data center for a full week, beginning Sept. 28. Nasdaq will similarly operate its PSX exchange out of the Chicago facility in late October, according to a September trader alert.

"It's a show of force," said Larry Tabb, head of market structure research at Bloomberg Intelligence, in an interview. "While Chicago may not be the end home, the exchanges could move anywhere where there's connectivity and open data center space."

Chicago has its own history with financial transaction taxes. Aldermen in Chicago, as well as Illinois lawmakers, have long pushed for a LaSalle Street Tax to help improve both the city's and state's finances. Any such tax would be bound to see similar pushback from the heads of Cboe and CME Group Inc., both of which are based in Chicago. Executives of both exchanges recently testified to the Chicago City Council's finance committee that they would uproot their companies if the LaSalle Street Tax were enacted. Jennie Huang Bennett, the city's CFO, also expressed opposition to the idea at the Sept. 21 hearing, citing the industry's reaction to New Jersey's proposal.

"The industry has high mobility," Bennett said. "Because trading is done electronically on servers, it can be picked up and moved to another jurisdiction in a moment's notice."

In New Jersey, the proposed bill under consideration would impose a tax of $0.0025 on every financial transaction that is processed using electronic infrastructure located in the state. Its backers have said the tax would bring in billions of dollars in revenues every year.

Gov. Phil Murphy, a Democrat and former Goldman Sachs Group Inc. executive, has expressed support for the idea but added that it remains in the works. Still, critics of the tax have said there is mounting evidence from other markets around the world such as Sweden, Italy and France that shows how a trading tax would end up hitting retail investors the hardest through higher costs to trade and lower levels of liquidity, rather than levying Wall Street firms.

In France, for instance, the 0.2% tax on certain stock purchases that was imposed in 2012 has generated a fraction of the revenues it was projected to and pushed traders and investors into other European markets, according to a July report from Greenwich Associates. A survey that CRISIL Ltd.-owned Greenwich conducted with 51 respondents across the global financial industry found that a financial transaction tax in the U.S. would ultimately end up hitting retail investors through wider spreads or even the return of trading commissions, which have all but disappeared from the retail trading universe.

"Ultimately, however the tax is going to play out, it's going to be passed down to the end user," said Jesse Greif, COO of OneChronos Markets LLC, in an interview. "That's exactly what's played out in Europe. It's hard to do something like this in a clean way."