Co-location is Key

Terry Flanagan

As exchanges look to move outside their core business of matching trades and toward diversification, the introduction of co-location services has become an increasingly common route.

CME Group is set to launch their co-location facility early next year, in what is expected to be a lucrative source of revenue and a key part of its operations going forward. A part of the facility will be low-latency access to the financial markets in Asia.

“This technology will give the CME and its customers an ultra-low latency gateway for financial trading in Asia,” said Michael DeVito, vice president of Enterprise Solutions at NTT America. “You read a lot about low latency in North America, between Chicago and New York, or Chicago and the West Coast. This is an end-to-end low latency solution. This was the only cable system operational after the Japanese earthquake and tsunami.”

NTT America, a unit of NTT Communications, will be providing its Arcstar service for its co-location center, which will provide users with low-latency trans-Pacific access to Asian markets. The company says that its Arcstar technology provides the fastest route between the U.S. and Japan over NTT Group-owned undersea cables.

NTT America is a subsidiary of NTT Communications, which is the global data and services unit of NTT Group, a Japanese telecommunications company.

CME Group last week announced that its co-location services, which will include hosting, connectivity and support services, will go live on Jan. 29, 2012. Exchanges worldwide are looking to increase the speed and lower the latency of their trading platforms, which most directly benefits high-frequency traders. Co-location facilities are located as close to their machine engine as possible, giving trading firms, including HFT firms, nearly instant execution times. HFT has grown to about 75 percent of trading volume in the U.S., according to industry estimates.

The service is expected to become a lucrative source of additional revenue for exchange operators, as they capitalize on the quest for speed sought by active, high-volume traders. CME Group has previously said that it expects to generate between $30 million and $40 million from co-location services when they launch next year.

“In any industry, proximity to end users is a big trend,” said DeVito. This is why we see data centers from Iceland to Denver, Colo., proximity to users is big. Proximity and speed is key in any transaction today.”

CME’s data center, located in the Western Chicago suburbs, has been purpose built for co-location use. It will provide equidistant cross connections to put all users on equal ground.

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