What Are the Economic Costs and Benefits of Co-Location for Trading Firms?

The primary benefit of co-location is superior execution speed, which can significantly increase the profitability of high-frequency trading strategies like arbitrage and market making. This speed allows firms to capture fleeting opportunities and reduce slippage.

The main costs are significant and recurring expenses for renting server space, connectivity, and maintenance, which can run into tens of thousands of dollars per month. This creates a high barrier to entry, as only well-capitalized firms can afford this direct market access, which is a major economic drawback for smaller players.