How Does Co-Location of Servers Help HFT Firms Execute Latency Arbitrage?

Co-location is the practice of placing an HFT firm's servers in the same data center as the exchange's matching engine. This drastically reduces the physical distance the order has to travel, minimizing network latency to the bare minimum (often microseconds).

This speed advantage allows the HFT firm to receive market data and submit orders faster than competitors, enabling them to execute arbitrage trades before the price discrepancy closes.