In general, colocation (or Colo) refers to the establishment of a shared facility to store IT equipment and specialized hardware of multiple individuals or companies.
In high-frequency trading (HFT), colocation refers to a dedicated space within a data center belonging to stock exchanges. Its primary purpose is to locate computers owned by HFT traders and firms in the same building as the stock exchange servers.
By doing so, the HFT companies and traders are able to receive current market prices earlier than the rest of the public. Although the difference is in the order of nanoseconds, HFT firms often pay millions of dollars for such an advantage.
In other words, the high-frequency traders use colocation to gain an advantage with the physical proximity between their computers and the stock exchange servers.
The concept of colocation gained traction in the past decade, giving birth to a new kind of business. Some say that the growing demand for colocation services explains why stock traders are creating bigger data centers close to major stock exchange servers.
For instance, the previous New York Stock Exchange (NYSE) facility was domiciled in a space of approximately 4600sq feet. However, the new data center occupies a space of about 39800sq feet, making it nine times larger than the previous one.
Besides the trading environment, the term colocation may also refer to specialized colocation centers (also known as carrier hotels). These are data centers that rent space, professional hardware, bandwidth, and other IT services. Such a specialized service is offered not only to other companies but also to individual customers.
These data centers offer cages, open racks, and private suites for institutions that require advanced security features. Finally, colocation is an excellent option for smaller firms as it provides them with the necessary infrastructure without the need to build everything from scratch.