Understanding concept of ‘Co-location’ on stock exchanges

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Trading is all about executing orders in the minimum time possible. In the wake of huge rush to place buy/sell orders, everyone wants to get his/her orders cleared at the earliest, in the milliseconds, from the time of placing the same. Even a slight delay can adversely affect the scenario.Co-location

Considering the huge traffic and want of speed in trading, exchanges came up with an idea to establish certain data centres for traders where they could place orders and have them executed in the minimum possible time.

Normally, many serious traders are situated at long distances from an exchange and even a slight delay can affect the speed of orders executed.

The (exchange) members and even non-members can easily place their computing systems just close to matching engine of exchange and issue buy/sell orders. Such a facility is called “co-location.” The facility is situated in the same area where exchange’s computer servers are institutionalized. Co-location can also be named as “low latency access.”

How it helps?

Co-location helps proprietary traders and High Frequency Trading (HFT) firms to access information about prices of shares just split second before other traders.

Why are stock exchanges opting for co-location facility?

The reason behind huge interest towards co-location is the profit making opportunity associated with it. Bourses charge sizable sums from traders opting for it.

Considering this, most stock exchanges in the US, Europe and other parts of the world have expanded their data centres. The old New York Stock Exchange building is only spread over an area of 46,000 sq ft, the NYSE Euronext data center in Mahwah, New Jersey is built over 398,000 square feet.

Scenario in India

NSE

One of the India’s biggest stock exchanges, National Stock Exchange (NSE) introduced co-location facility seven years back in August, 2009. The idea was to offer full racks and half racks to the traders as per their paying capacity. Half racks were targeted at brokers with 100 clients or fewer. Mostly domestic traders avail the facility. It’s a healthy mix of trade executed on co-location divided between high-frequency investors and long-term traders. For those who think markets can fall flat in wake of the “flash crash” when high frequency traders carry out large volumes of trade in a very short span must know that Indian bourses work on the concept of “circuit breakers.”

BSE

The facility of co-location went live on Bombay Stock Exchange (BSE) in November 2010. BSE tied up with Netmagic Solutions and Thomson Reuters for facility of 80 racks. While the former is managing co-location facility, the latter is giving feed of more than 50 global stock exchanges.

eFundsPlus was unable to track the accurate incumbent charges for availing co-location facility on both these major exchanges.

However, in 2010 NSE used to charge Rs 20 lakh per rack and an annual fee of Rs 2.5 lakh for IT services. It charged Rs 8.5 lakh plus an annual fee of Rs 1.5 lakh for half rack. Also it charged one-time initial set-up fee of Rs 1 lakh and Rs 50,000 for full and half-racks, respectively.

What do critics say?

Critics of co-location facility claim that algorithmic trading through this is very undemocratic. Regulators in some of the developed countries are concerned that small investors are not able to avail this facility on an equal footing as big ones because of huge rent fee involved and hence face discrimination. However, supporters of the facility claim that co-location rents out half-racks also to cater to large number of small investors just like whole racks are rented out to big ones, thus democratizing the whole idea.

Ashish Pandey

I am a business journalist who is currently employed at Zee Business. My areas of interest include business and foreign policy. You can reach me on Twitter at @ashuvirgo1984 or @eFundsPlus.

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