In recent years, a combination of regulatory reforms, market structure evolution and technology innovation have combined to create a new paradigm for the global financial trading markets; one in which the speed at which transactions can be executed is fundamental to the success of market participants.
Put simply, for such a participant – be it an exchange operator, a broker or a trading firm – to win in the new electronic marketplace of complex algorithmic and high-frequency trading (HFT), they have to be faster than their competition. And the margin that separates the winners from the also rans is now measured in microseconds, with nanoseconds not too far off.
Colocation has established itself as the access mechanism for trading firms requiring the fastest possible execution. It’s widely accepted that for firms wanting the lowest latency access to a specific market there is no substitute for placing their trading applications as close as possible to the matching engines themselves, making it the solution of choice for all but those focusing on multi-venue multi-location arbitrage.
High frequency trading (HFT) is now a term recognised by the mainstream. This wide familiarity has coincided with maturity of HFT practices, the explosion in their use, and a flattening out of the potential returns as competition increases.
