A major component of HFT, server co-location, is now becoming a critical regulatory hot topic. The SEC has told the Nasdaq it will regulate its co-location business going forward. This is occurring even as the SEC is furiously googling terms like co-location and high frequency trading, and watching riveting debates between Michelle Caruso Cabrera and Bob Pisani, to find out just what they mean, and what exactly it is they are supposed to be regulating.
From Traders Magazine
"We have been asked by the SEC and consented to--indeed embraced--their regulation of our co-location business," Eric Noll, a Nasdaq executive vice president in charge of transaction services, told Traders Magazine. "Their goal is to make sure that access to our marketplace is fair. That is also our goal."
Of course, Nasdaq shares some spirited support of co-location, which Mr. Noll forgets to add is a major revenue stream for exchanges:
"Co-location is not going away," Noll added. "But the way the market is evolving is positive. Exchanges are providing it and it's regulated and access is fair."
And just in case the SEC atually wants to figure out what it is that is is supposed to be regulating, here
Co-location is a service offered by market centers and third parties, such as Equinix, that involves making rack space available to firms for their trading servers in facilities near market centers' matching engines. Placing one's trading server nearer to an exchange matching engine reduces communication times, increasing the chances of beating competitors to profitable trading opportunities.
Many of these data centers are in New Jersey where NYSE Euronext is building a 400,000 square foot facility for co-location purposes.
Because of the perception of unfairness, some in the industry have argued more transparency into the allocation practices of exchanges's co-location business is warranted.
Zero Hedge is still waiting for the NYSE's release of its co-location terms as was disclosed to us some time ago. It would be useful to have a benchmark for retail investors of just how much it would cost them to be competitive with the GETCO's and the Goldman Saches of the world, especially now that the cost-benefits of trading on dark pools may be shifting back to open exchanges.