Colocation all the rage

Colocation is the name of game right now on Wall Street, where the need to shave milliseconds off of execution times has become a competitive necessity. A space of 100 miles equates to a full second. To collapse that meaningfully, trading firms need to get closer to market centers. All this is leading to unprecedented build-out activity right now, amid questions about how low execution times can drop and some incipient regulatory scrutiny.  

All this is in some sense confirming the dictum: The data center is the exchange. 

The NYSE Euronext is among the leaders. It has secured a massive space, "big enough to accommodate three football pitches," in an industrial park 30 miles outside of London, notes the Financial Times. It amounts to a massive colocation facility. "Racks of computer space sit in vast, bomb-proof, air-conditioned halls. They will contain the electronic trading 'engines' that allow millions of trades in equities, options and futures contracts to change hands every day on NYSE Euronext's platforms." The NYSE is also building a similar facility in Mawwah, N.J. The goal here is to offer latency of about 75 microseconds within a year or so. A microsecond, just so you know, is about 1/1000 of a millisecond. 

But there are a host of much smaller technology companies that offer colocation services. Equinix operates 45 data centers in 18 markets in 10 countries. It has also announced a new venture in Geneva. Other firms include Savvis, 7Ticks, Switch and Data and British Telecom. They've opened up data centers in the major financial markets around the world to accommodate high-frequency trading firms. 

Certainly, there's a huge demand out there, as the buy-side develops the expertise and algorithms to harness all this power. Hedge funds and high-frequency broker dealers are among those that rely on speed. They'll pay to get close. For now, it's an expensive game to be playing--favoring those with deep pockets. 

Already, we're seeing a low-intensity battle beginning, between the established exchanges and their competitors. Direct Edge has plans to offer data center services, owned by Equinix, soon. BATS, based in Kansas, will offer similar services located in New Jersey. 

"Co-location is a legitimate business and levels the playing field for investors in different physical locations, but I believe we need to have as much transparency about the pricing of such a service as possible," the CEO of Direct Edge told the Financial Times. 

The SEC is also taking a look at fees and other issues, and some guidelines may be forthcoming. - Jim