It seems like every time I turn on the TV or pick up a newspaper someone is discussing, or shall we say, vilifying, high frequency trading and, now more recently, co-location – and the most frustrating part is not the debate about the issues, but that the vast majority of those opining are misinformed. So, I wanted to take a few minutes to help set the record straight about co-location and storage of servers.
First, the practice of co-locating your servers with a 3rd party provider such as Verizon (NASDAQ Data Center), AT&T, or Radianz (3 of the bigger providers to the financial service industry) started many years ago due to rising costs. Building your own technology infrastructure to support an ever growing electronic transaction business can be incredibly expensive (and that cost ends up trickling down to the end customer) so it simply made good business sense to look for ways to drive down these costs. By renting rack space, power, cooling and backup power within these facilities and utilizing the expertise and services of the providers the firms who choose to co-locate where able realize economic savings. These facilities are very large and co-location results in the benefit of economies of scale.
Some have asked, “How does co-location benefit the average retail investor?” The concept and benefit is quite straightforward and I will use our firm as the example. Being able to co-locate our servers and technology, Lightspeed is able to keep a streamlined and cost efficient infrastructure. By keeping fixed costs to a minimum, Lightspeed then delivers a state-of-the-art trading platform with low commissions to ANY and ALL customers that wish to use it. The ability to utilize a direct access platform at commission levels below web trading competitors begs the question, why would anyone trade on a web-only platform? Not sure I have a good answer for that, you’d have to ask those customers. Simply put, any firm that takes on more cost has to pass it on in some form to the end customer. If Lightspeed can lower its costs, we, in turn, can pass that savings on to our customers.
Lastly, why do so many people frown upon the concept that NASDAQ allows brokers and individuals to co-locate in their facility? This makes all the sense in the world. Through the co-location program, NASDAQ can defray the costs to run their matching engine and therefore can deliver a better product and service to its customers who can, in turn, deliver a better product to the end customer. So again, why the frown? All I can determine is that this “term du jour” was picked up, twisted, and spewed out by many in the media and even some industry “experts” without their having ever being really understood what co-location is and how it can benefit all parties.
What’s my point? I guess it is time to “turn that frown upside down” because co-location actually works and benefits customers big and small. And maybe, just maybe, what we see on TV or read in the newspapers is isn’t always completely accurate. Something to think about.
