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Co-location or Proximity Hosting by Stock Exchanges

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Time is a crucial factor for those trading in the securities markets. Every millisecond counts in the world of financial transactions. In order to minimise or eliminate delay in the execution of trade orders, stock exchanges offer co-location or proximity hosting services. Through this, a broker or a data-vendor is permitted to be located within or at close proximity with the stock exchange and can connect to the trading platform through a direct and private network.

In light of the recent rise in such practices, SEBI, based on the recommendations of the Technical Advisory Committee, issued the guidelines through a circular dated May 13, 2015 which focuses on two major aspects. The first concern is ensuring fair and equitable access to the co-location/proximity hosting facility. The guidelines stipulate that the provision of the co-location/proximity hosting must be in a fair, transparent and equitable manner, and stock exchanges must ensure that the space available for these facilities is sufficient to accommodate all stock brokers who are desirous of availing the facility. Stock exchanges are required to specify the eligibility requirements on their websites, and on receipt of applications, must expeditiously decide on the request.

The second concern is ensuring that the facility of co-location/proximity hosting does not compromise the integrity and security of the data and trading systems. The guidelines mandate that stock exchanges must implement safeguards and other suitable mechanisms to protect their systems from unauthorized access, create guidelines on access and conduct of personnel of stock brokers in the co-located space and ensure that these personnel have no access to the stock exchange’s trading platform and databases. Stock exchanges are required to take necessary steps to implement the guidelines contained in the circular, including making amendments to existing bye-laws and rules, within a period of three months.

While this circular gives legitimacy to the provision of co-location/proximity hosting facilities by stock exchanges, it stops short of providing clarity on the eligibility criteria. Hence, there is a risk that stock exchanges may set a high threshold and effectively limit the benefit of low delay trading to a small section of securities market participants. It remains unclear whether this will act as an unfair advantage for only those who can afford the facility.