Definition of co-location

In a sign of the rush for speed in trading, ex­changes are building huge data centres where traders, members and non-members alike, can place computers containing their trading algorithms next to an exchange’s matching engine, which matches “buy” and “sell” orders. This “co-location” shaves crucial milliseconds from the time it takes to complete a trade. [1]

If traders are located 100 miles away from an exchange, they face a delay of one millisecond whenever they seek to trade a price via their computer screen. Few serious investors can afford to be that late to prices that flash so quickly. The blink of a human eye takes 300 milliseconds; many traders now operate in the smaller realm of microseconds.

Being faster than rivals to the best price – that is, having the lowest “latency” – is thus crucial in today’s markets. [2]

Example
NYSE Euronext is spending $500m to build two centres, one in New Jersey, another in Essex, England, each larger than two soccer pitches. Specialist companies also operate such co-location centres – including Nasdaq-listed Equinix, which expanded in Germany. [3]

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