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Demystifying Exchange Colocation

Colocation has established itself as the access mechanism for trading firms requiring the fastest possible execution. It’s widely accepted that for firms wanting the lowest latency access to a specific market there is no substitute for placing their trading applications as close as possible to the matching engines themselves, making it the solution of choice for all but those focusing on multi-venue multi-location arbitrage.

But the perception to date has been – and justifiably so – that exchange colocation is a premium service reserved for the larger institutions. For many smaller and remote practitioners – hedge funds and prop traders who lack the IT resource normally associated with colocation – cost is a prohibitive factor in their decision whether to colocate.

New exchange technologies, however, are allowing venues to help ease the burden of colocation for these players. By packaging technology-based services into entry-level offerings, innovative exchanges are lowering the cost of entry and allowing smaller players to compete on a level playing field with their larger rivals.

This paper discusses the key drivers, benefits and challenges associated with the trend toward colocation. It describes key factors practitioners should take into account in their assessment of colocation possibilities, and suggests that firms should take a close look at the facilities and potential community aspects on offer.