Suppose a favourable price appears. Two traders react. Whoever's order reaches the matching engine first gets filled at the good price; the loser gets a worse price or nothing.
Step 1 — model total delay. Break the round trip into parts:
Ttotal=tdecide+tpropagation+tbroker+tqueue
Why this step? Every real delay must fall into one of these buckets, so summing them gives the honest total.
Step 2 — propagation delay from distance. Signal speed in fiber:
v=nc≈1.53×108=2×108 m/s
Why? Fiber has refractive index n≈1.5, so light is slower inside glass than in vacuum. Then one-way time over distance d:
tpropagation=vd
Step 3 — see the colocation gain. Moving your server from d1 (far) to d2 (colocated) saves:
Δt=vd1−d2
Why this matters: even 100 km of distance is
2×108100,000=500μs,
a lifetime in HFT where edges are measured in microseconds (μs) and even nanoseconds.
HFT firm rents a colocation rack inside the exchange building.
Firm uses DMA (often sponsored access, where it uses the broker's membership/exchange ID) so its algorithm's orders go straight onto the order book.
Orders travel a few metres of cross-connect cable → matching engine → filled first → profit from the tiny time advantage (market making spread, arbitrage, etc.).
Why do exchanges give equal cable lengths in colo?
To keep colocation fair — advantage is being in colo, not which specific rack.
Why do firms use microwave links between cities?
Air has n≈1, so signals travel closer to c (faster than fiber's slower c/1.5).
Can you be colocated but still slow?
Yes — decision time, queueing, and processing latency remain; colo only cuts distance latency.
What is "sponsored access"?
DMA where a firm uses a broker's exchange membership to place orders directly under its own algo.
Recall Feynman: explain to a 12-year-old
Imagine everyone shouting orders to a shopkeeper. The person standing right next to the shop is heard first — that's colocation (sitting super close to the exchange). Now imagine that instead of whispering to a friend who then tells the shopkeeper, you speak straight to the shopkeeper — that's DMA (no middleman). If you do both, your order reaches the shop before anyone else's, so you grab the good deal first. In real markets, "close" and "no middleman" can mean winning by a few millionths of a second — and that tiny bit is worth a lot of money.
Dekho, HFT ki puri duniya ek race hai — aur race sabse tez trader jeetta hai, sabse smart nahi. Jab market me koi accha price aata hai, jiska order pehle exchange ke matching engine tak pahunchta hai, wahi bandaa acche rate pe fill hota hai. Signal fiber cable me light ki speed se chalta hai, lekin fiber me light thodi slow hoti hai (around 2×108 m/s), isliye distance jitna kam, time utna kam. Yahi baat hai colocation ki: apna trading server exchange ke building ke andar hi rakh do, sirf kuch metre door — taaki propagation delay minimum ho jaye.
Direct Market Access (DMA) alag cheez hai. Traditional tarike me tumhara order pehle broker ke dealer ke paas jaata hai, wo aadmi use padhta hai, phir exchange terminal me type karta hai — isme seconds lag jaate hain. DMA me tumhara algo seedha exchange ke order book pe order daalta hai, bina kisi human middleman ke — matlab microseconds me kaam. Yaad rakho: colocation = paas hona (distance ka delay katta hai), DMA = beech ka aadmi hatana (human ka delay katta hai). Dono alag problem solve karte hain.
Formula simple hai: t=d/v. 100 km ka matlab 500μs ka delay — HFT me ye ek yug jaisa hai! Isiliye badi firms dono use karti hain: colo bhi lete hain aur DMA bhi. Ek common galti — mat sochna ki colocation se latency zero ho jaati hai; decision time aur queue time to phir bhi rehta hai. Aur ek aur mazedaar baat: fiber slow hoti hai isliye kuch firms sheheron ke beech microwave links use karti hain, kyunki hawa me light almost c ki speed pe chalti hai. Bas — close raho, middleman hatao, aur race jeeto.
