Co-location: What's next?

With high frequency trading now one of the most buzzed-about issues in the industry, co-location, a technique used by many high frequency traders of placing trading servers near an exchange's matching engine to reduce order message times, is now a hot topic too. The Futures Industry Association hosted a panel of experts yesterday in Chicago to discuss co-location: its growth, its advantages and challenges on the horizon.

Roji Oommen, business development manager at Savvis, said that the main advantages of co-location are the reduction of risk and lower latency times. Mike Manske, network architect at West Monroe Partners, pointed out that co-location offers flexibility for firms who don't have the resources to manage their own data facility.  Tom Guinan, chief information officer, Advantage Futures, pointed to latency issues as one of the main reasons Advantage Futures uses co-location. "If you're satisfying your most latency-sensitive clients, you're satisfying the rest of your clients as well," he said.

The panelists also discussed how their current co-location facility at 350 E. Cermak would be affected by CME Group's co-location facility that will open in 2012.  "It's a big schoolyard. The more people who come to play, the better," said John Churchill, director of sales at Equinix.

"CME's decision adds complexity. [Advantage Future's] need for space at 350 E. Cermak won't decrease very much, [but] there will be an increased need for us to support another location because a lot of people trade intercommodity spreads. It'll be tough to tell initially where the best place is to be," Guinan said.

It was brought up on the panel that co-location does come at a cost and certain segments may be priced out. In June, the Commodity Futures Trading Commission aimed to remedy that problem by  proposing a rule that would require that co-location and proximity hosting services be available to all qualified market participants willing to pay for the services.

Of the regulatory proposals, Churchill said that there's never as completely a level playing field as the regulators would like, and it's still too early to tell how new regulations will affect co-location. Diane Saucier, vice president of global market development at Trading Technologies, said that the intentions of the proposals are positive and in the best interest of the users, but the outcome was still uncertain.

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