Pitfalls of Proximity Hosting
Zero latency is the optimal trading speed that all firms hope to achieve at some point. But until that can become a reality, there is a race to keep reducing latency from all aspects of the trading process. From the server to the messaging to the sending and receiving of data, each piece must be optimized to reach the goal of zero latency. There are many avenues companies are looking at to reduce variables and risk to latency Ð one of those is proximity hosting.
There are data centers where the trader can actually collocate with the exchanges. For example, in Weehawken, NJ there is a data center that houses five major exchanges including: the American Stock Exchange, Philadelphia Stock Exchange, and BATS Trading. This is a way to ensure there is almost zero latency built into the trade to those exchanges. But it is not the complete puzzle. Even with proximity hosting to collocate within a data center that houses exchanges there are still external servers that play a role in the execution of the trade. These are the data feeds, the platforms, your proprietary content, and the messaging. Even the data centers that host the exchange as a simple cross connect, are rarely the only exchange a firm is trading on. So how do you close the gap?
While a firm may be trading a particular asset class and the majority of trades may be directed toward a single venue, the volumes and price-points on related exchanges play critical roles in execution decisions. This means latency must be minimized from all data sources, not just the venue the majority of trades are placed on. For instance, having the lowest latency on venue A, but being significantly behind the market on venue B or C could have disastrous