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Colocation concerns the practice of accessing prices a split second faster through direct feeds.
This differs from the congregation of data that is generally transferred between two exchanges then displayed on a trader’s computer, mobile device, or tablet.
Popularized out of the wake of high-frequency trading, colocation is becoming more sought after as speed continues to prove paramount within the day trading arena and algo trading is on the rise.
What Are the Benefits of Colocation?
The core advantage that stems from colocation includes lower latency. This helps traders to secure the best price while shaving vital milliseconds off the time it takes to execute trades.
Networks continue to grow in complexity and speed continues to play a paramount role in trading.
There are also in turn, more chances of a system failure or potential outages which can prove especially hazardous for high-frequency traders (HFT).
For traders who reside near the servers used for the matching engines, colocation may not be required due to a decreased network latency between hosted data centers.
In the United States, Nasdaq offers customers the ability to colocate its services and equipment within the Nasdaq Data Center, which provides the liquidity and speed needed for all U.S. markets but this opportunity comes with a fee.
For trading firms that colocate their services, their computers are almost always among the first orders executed on any single trade, and given the technology utilized far less oversight is required on the exchange itself.
As HFT and algo-trading continue to grow in popularity, so will the practice of colocation as a means to level the dynamic trading field.