Definition
Co-location
Co-location is the practice of placing a trading member's servers physically inside or immediately adjacent to the exchange's data centre so that orders reach the matching engine with the lowest possible latency.
On the NSE and BSE, co-location is offered as a paid service where members rent rack space, power and cross-connects in the exchange's facility. The shorter cable distance to the matching engine translates into a measurable speed advantage worth real money for HFT and arbitrage strategies.
Co-location has been at the centre of major regulatory controversy in India, notably the NSE co-location case, where allegations of preferential access to the tick-by-tick data feed led to SEBI investigations and disgorgement orders. To address fairness, exchanges introduced measures such as equal-distance cabling, a multicast TBT feed, and tighter access controls.
Related terms
- High-Frequency Trading (HFT)High-frequency trading is a subset of algorithmic trading characterised by extremely high order submission rates, very short holding periods and reliance on ultra-low-latency infrastructure to capture tiny, fleeting price discrepancies.
- Low LatencyLow latency refers to minimising the time delay between a market event and a trading system's response, measured in microseconds or nanoseconds for the fastest participants.
- Latency ArbitrageLatency arbitrage is a strategy that profits from being faster than other participants to act on the same information, capturing price differences between venues or instruments before they realign.
- Tick-by-Tick Data FeedA tick-by-tick (TBT) data feed broadcasts every order book event, additions, modifications, cancellations and trades, in real time, giving the most detailed live view of market microstructure.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.