By Patrick Lannin
STOCKHOLM, July 14 - Swedish regulators have raided U.S.-owned bourse operator Nasdaq OMX Group in a competition probe likely to raise questions over exchanges' efforts to woo controversial high-frequency traders.
The raid, carried out last month, was prompted by a complaint by new Nordic marketplace Burgundy.
Burgundy said it was denied space for its computers alongside those of clients, such as banks, in a data center owned by U.S. telecoms company Verizon.
That put it at a disadvantage to larger rival Nasdaq OMX, Burgundy said, which had got space in the data center near clients enabling the exchange to execute super-fast trades.
Physical closeness of a trader's computers to those of a stock exchange -- a practice known as co-location -- can shave fractions of seconds off client orders, giving the super-fast trader an edge over those that are further away.
"It was only a matter of time before the regulators began to look at how people have access to markets in terms of co-location because how close you are to the box can make a vital difference," said Herbie Skeete, managing director at exchange consultants Mondo Visione.
Established stock exchanges, under pressure from alternative venues such as Burgundy, are increasingly relying on the revenues and liquidity provided by hedge funds and proprietary firms that use algorithms to execute lightning-fast trades.
Burgundy Chief Executive Olof Neiglick told Reuters his company had agreed in 2010 to house its servers in the Verizon center, but the U.S. firm later canceled the deal and it had to move to a location 5 kilometers away.
Nasdaq OMX and Verizon said on Thursday they were cooperating with authorities.
Court documents showed the Swedish competition authority had been authorized to raid both Nasdaq and Verizon's Swedish business. A spokeswoman for the regulator confirmed a raid had taken place.
The court documents said KKV, the competition authority, wanted to investigate whether OMX had applied pressure on Verizon or threatened to punish Verizon if the telecoms company made an agreement with one of its competitors.
"According to the KKV, OMX and Verizon's actions mean that Burgundy risks being shut of the market in bourse trade with Nordic securities," the document said, adding there was reason to believe that "OMX's actions amount to a violation of rules on abuse of a dominant position."
The competition authority was allowed to look for evidence such as e-mails, notes, letters, faxes and meeting minutes.
Competition between exchanges has become intense, with this year seeing a flurry of cross-border deal attempts by bourses eager to cut costs and diversify in the face of fast-eroding market shares in their traditional businesses.
Burgundy was launched in 2009 by its owners, a consortium of Nordic banks and brokers, to pressure OMX to keep trading fees low. Larger so-called multi-lateral trading facilities (MTFs) such as BATS and Chi-X also compete in Europe.
Mondo Visione's Skeete said other smaller players were also likely to challenge the practices of their bigger rivals.
"If you are a small player ... and you think the incumbent is not making it easy for you then you are going to look at any angle you can to level the playing field," he said.
Burgundy's average daily turnover in June was 147 million euros for a total monthly trade of just over 3 billion euros, while equity trading on Nasdaq OMX's Nordic market in June, including over-the-counter business, came to 50.9 billion euros for average daily turnover of 2.6 billion euros.
The Vienna Stock Exchange told Reuters on Wednesday that it was looking to boost lagging volumes by attracting high-frequency trading firms.
But global regulators said earlier this month that high-frequency traders needed to be reined in to avoid a repeat of last year's "flash crash" that briefly sent U.S. blue chips into freefall, sending shivers down the spines of investors.
High-frequency derived volumes now account for half or more of trading on exchanges such as the London Stock Exchange and U.S. trading platforms. Proponents of the sector say the funds provide liquidity that otherwise wouldn't be there.
(Additional reporting by Mia Shanley in Stockholm, Kylie MacLellan and Karolina Tagaris in London, Blaise Robinson in Paris, Jonathan Spicer in New York; Writing by Kylie MacLellan, Editing by Dan Lalor and Erica Billingham)