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.
Mr. Murphy, a former executive with Goldman Sachs Group Inc., reiterated on Friday that he liked the concept of taxing trades but said he doubted it could help fix the state's fiscal problems given the uncertainty associated with it.
"I do believe, personally, there is enormous value to them for proximity, " Mr. Murphy said at an unrelated news conference, referring to the operators. "We've begun a dialogue with operators and would hope we can have a peaceful and constructive dialogue."
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 saying at a press conference last month that he supports the tax.
"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 firstname.lastname@example.org and Joseph De Avila at email@example.com