Co-Location

Co location means placing your trading servers in the same data centre as an exchange's matching engine. Instead of data and orders crossing cities or continents, they travel a few dozen metres of cable. Co location cuts network latency from milliseconds to microseconds, which is essential for high frequency trading, market making and latency arbitrage. Exchanges sell co location as a service, alongside direct data feeds and cross connects, and it has become a significant source of exchange revenue.

How co location works#

1. Rent space in the exchange's data centre: a rack, part of a rack or a cage.
2. Install your servers and network equipment.
3. Order cross connects: physical cables to the exchange's order entry and market data networks.
4. Subscribe to direct feeds and order entry sessions.
5. Tune hardware and software to use the short path fully. See Kernel Bypass and Low-Latency Networking and FPGAs and Hardware Acceleration.

Major co location sites#

Firms often co locate at several sites and link them with fibre and microwave networks for cross venue strategies. See Networking for Traders.

Fairness and equal cable lengths#

Exchanges aim to treat co located customers equally. Some cut every customer's cable to the same length, coiling extra cable for racks that sit closer, so no one gains a few nanoseconds from rack position. Regulators expect co location services to be offered on fair, transparent and non discriminatory terms.

Costs#

Totals range from thousands to many thousands of dollars per month per venue for a modest presence, and far more for large firms.

Who needs co location#

Proximity hosting#

Not every firm needs space inside the exchange's own hall. Proximity hosting in nearby data centres, or cloud regions near the venue for crypto exchanges, gives much of the benefit at lower cost. For retail traders, a server in the same city or cloud region as the broker or exchange is the practical equivalent. See VPS, Cloud and Bare-Metal Servers.

Debates#

Critics argue co location gives paying firms an unfair head start over other investors. Supporters argue it is available to anyone willing to pay, improves liquidity and narrows spreads. Some venues have introduced speed bumps to blunt latency advantages. See High-Frequency Trading.

Frequently asked questions#

What is co location in trading?#

Placing trading servers in an exchange's data centre, connected by short cables to its matching engine and data feeds, to minimise latency.

How much does co location cost?#

It varies by venue and setup, typically thousands of dollars per month or more once space, power, cross connects, data and hardware are included.

Do retail traders need co location?#

No. Retail strategies rarely depend on microseconds; a server in the same region as the broker or exchange is enough.

Next, learn how firms skip the operating system to save time in Kernel Bypass and Low-Latency Networking.