Financial markets have evolved over the last thirty years and electronic trading has taken centre stage. As markets face sharp movements due to intense volatile conditions getting to a price first has been a priority for all trading members.
In this environment, co-location has become synonymous with faster execution and HFT. Co-location is simply positioning oneself as close as possible to the counterparties one wants to trade, with the intention of ensuring market data and executions are received instantaneously. Those counterparties that everyone is snuggling near can be exchanges or OTC dealers.
In the fragmented world of OTC FX, co-location has been slower to take place. However, as the asset class gets further recognition, more players have begun to take part in the market which has created demand for co-location facilities similar to equities and futures.
Co-location has been part and parcel of the exchange trading environment since the last decade when banks and professional traders invested in automated trading solutions. The concept started in the equities markets where traders created algorithms to trade stocks since the 1980s but the trend took off in the 2000s as computer power became cheaper and more accessible.
Responding to the increase in automated trading and demand of low latency executions from HFT players, stock exchanges began to house trader servers in their own data centres. At the NYSE, servers are based in New Jersey where firms can co-locate next to the exchange server.
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Current estimates are that algorithmic and high frequency trading account for 55-70% of global equity trade flow as firms have spent considerable amounts of capital to ensure theirsystems get the price and data first.
Role of Co-location
Co-location is a by-product of the need to reduce latency, or latency optimisation. The demand to execute with immediacy has been the driving force behind co-location. In essence a hedge fund situated in Frankfurt who wants to reduce any ‘additional factors’ when competing with a New York based hedge fund in regards to latency, can use co-location to increase the proximity of their servers, something previously unavailable.
Roji Oommen, Senior Director of Business Development in the Financial Services Division of Savvis, a leading provider of Managed Hosting Solutions, Co-location, Automated Management and Provisioning Systems, and Information Technology consulting across the globe believes co-location has come from growth in algorithmic trading strategies. He says “Co-location has generated interest for a number of reasons.
First and foremost, as the world becomes more electronic and digital, the computer infrastructure required to operate and support it has become much larger and even more critical”.
This is an excerpt from a full and detailed report on co-location published in the Forex Magnates Quarterly Industry Report for Q4 2012.