A small share of trading activity on the stock exchanges comes from traders who aim to profit from trading faster than others.
These market players position their servers within the stock exchange premises through a practice called co-location. This reduces the time required for their orders to reach the exchange, thus enabling them to capatilize on the slight advantage gained from the fractions of a second they save.
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Co-location has increasingly contributed to stock exchange activity in recent years. It showed a rising trend in the recent periods for which data is available. But it now shows a decline for the cash segment on the BSE, and both the derivatives segment and the cash segment on the National Stock Exchange (NSE).
The NSE derivatives segment share of co-location in trading activity dropped from 50.5 per cent in February 2024 to 49.6 per cent in March 2024. The cash segment share dropped from 36.1 per cent to 35.9 per cent in the same period.
Hitesh Hakani, director, GreekSoft Technologies, says the dip in the share of co-location may reflect a move towards other modes of trading. “Some corporate clients who were opting for the co-location mode of trading in February could have switched to the direct market access mode in March,” he says.
The chief executive of an algorithmic trading solutions provider suggested that the trend may not reflect a major change in trading patterns.
Co-location, which was launched by the NSE in 2010, is usually the domain of institutional investors who locate their servers on the site of the stock exchange, in exchange for a fee, to cut down on latency and trade that much faster. The speed of information transfer through co-location ensures that a lot more orders can be executed in shorter time intervals.
Co-location on the NSE has been seeing increased demand, said its Managing Director and Chief Executive Ashishkumar Chauhan in a February 12 call with investors. “Because the demand is more, we are also creating more and more data centers within our buildings to ensure that the demand is met as much as we can. We are currently expanding the data center space, which can be potentially created in the current NSE building. We are in the process… after taking every necessary approval to take the entire data center, which is currently in the NSE building, to another site in Mumbai or near Mumbai. So, that process is currently on,” he said.
“But for the foreseeable future, until the time we shift our data center, we will continue to provide as much space for co-location and as much data pipes to as many brokers, retail, or otherwise, that they require for connecting to us ,” Chauhan added.
