Leaving N.J. for Chicago gives no easy tax fix to Nasdaq, NYSE

As Nasdaq Inc. and the New York Stock Exchange consider abandoning their New Jersey data centers over a proposed financial transaction tax, they may not find their backup sites in Chicago guaranteed to be levy-free havens.

This week, CME Group Inc. Chief Executive Officer Terry Duffy and CBOE Global Markets CEO Ed Tilly visited the Chicago City Council’s finance committee to try to head off an idea floated by some aldermen for the Windy City’s own transaction tax. Duffy said such a levy would result in lost jobs and revenue and his company could move if it was passed.

This isn’t Duffy’s first tax fight. In 2016, he said he’d “have no other choice” than to move the company out of the state if it adopted a proposed $1 to $2 tax on trades at CME Group as politicians went searching for new revenue to fix a budget crisis. That measure failed, but an increase in corporate taxes by Illinois in 2011 sparked the same threat to bail from CME.

Michael Nagle/Bloomberg

States and municipalities facing multibillion-dollar budget shortfalls from the pandemic are looking for new revenue sources, and the financial industry’s relatively stable profits are a ripe target. Now, rival firms are banding together to fight those proposals, with the threat that electronic operations are flexible enough to avoid new taxes.

Nasdaq Inc. will temporarily move some operations to Chicago late next month, escalating a dispute with New Jersey over proposed taxes that would generate billions of dollars from high-speed trading at the stock exchange and its rival firms. The NYSE plans to test a full exit from New Jersey during the week of Sept. 28 by operating its Chicago equity exchange from a secondary data center.

There’s no formal ordinance for any transaction tax in Chicago, and any proposal would have to overcome opposition from the city’s chief financial officer, Jennie Huang Bennett, who cited the current New Jersey fight as evidence of such a levy’s ineffectiveness. Even if the city were to push ahead, it would need to seek state authority for such a tax.

“The state of Illinois has contemplated a financial-transaction tax in the past but are aware of the transitory nature of exchange operations,” Rich Repetto, an analyst at Piper Sandler & Co., said in an interview. While a transaction tax might be beneficial for a state in the short term, over the long term it would likely cause exchanges to relocate, Repetto said.

Nasdaq spokesman Joe Christinat and NYSE spokesman Farrell Kramer declined to comment, as did CME spokeswoman Anita Liskey.

In his testimony, CME’s Duffy noted that the company leases space in a data center that has 30 locations in the U.S. where it could move its operations. Two of the most widely used data centers for financial markets are in Aurora, Illinois, and Secaucus, New Jersey.

New Jersey Governor Phil Murphy is considering a tax on stocks, options, futures and swaps trading that could go into effect for the 2022 budget year and could drum up $10 billion for the state. Wall Street giants that have also threatened to move operations out of the state include Citadel Securities and Virtu Financial Inc.

— With assistance from Shruti Date Singh and Elizabeth Campbell