Co-location gets referee

August 31, 2010 07:00 PM

imageMarket participants are weighing in on a proposal by the Commodity Futures Trading Commission (CFTC) that could shake up the world of co-location and mean changes for the high frequency trading firms who use it.

Co-location, placing trading servers near an exchange’s matching engine to reduce latency, faces regulatory oversight as the CFTC proposed rules on co-location on June 11. The proposal called for exchanges to offer equal access to co-location facilities and disclose latency numbers from those facilities, that there must be uniform fees for co-location and that exchanges must have agreements in place with third-party service providers to carry out self-regulatory obligations.

In its comment letter to the CFTC, the Futures Industry Association (FIA) said, "FIA agrees that making latency data available is desirable, but the exchange should be required to report only the latency between its hand-off point for market participants and the public edge of its matching engine at both its exchange data centers and regional proximity sites managed by the exchange." FIA also wanted to ensure that the "uniform and non-discriminatory" fees would apply only to co-location fees and not other types of exchange fees.

"We’re still very early in the rule-making process, so what’s actually going to come out of it is yet to be seen," says Nathan Ulery, director of infrastructure solutions at West Monroe Partners. He adds that the end result of these proposals should be that new entrants into the market will have a more level playing field from a technology standpoint.

However, Tom Guinan, chief information officer at Advantage Futures, says there doesn’t seem to be a need for more regulation right now. "Currently there seems to be fairly easy access [to co-location] for anybody who wants it. They [might] see something coming down the road because exchanges are getting into the co-location business," he says.

CME Group’s decision to open its own co-location facility in 2012 will add complexity for some firms. For example, Guinan says that when CME Group’s facility opens, Advantage Futures will have to have a presence there along with their current co-location facility at 350 E. Cermak in Chicago.

"All of the exchanges are picking different facilities to go into [and] firms are looking for market opportunities," Ulery says.

At a panel the FIA hosted on co-location in late July, John Churchill, director of sales at Equinix, 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.

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