What Is ‘Co-Location’ in the Context of Exchange Trading?

Co-location is a service offered by exchanges where high-frequency trading (HFT) firms place their servers physically within the exchange's data center. This physical proximity drastically reduces the latency (time delay) in receiving market data and sending orders to the exchange's matching engine.

While expensive, co-location provides a critical speed advantage, allowing HFT firms to react to market events milliseconds faster than competitors. This advantage is often used for legitimate arbitrage but can also be exploited in strategies that border on front-running.