Hosting & Co-Location special report

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Proceed with Caution

Turn the clock back two years and not very many people in our industry would have heard of the co-location and proximity-hosting phenomena. Even fewer would have had a thorough understanding of what exactly these services entail and why they were introduced to the financial services industry in the first place. It is fair to say that the astonishing growth in the hosting industry we have witnessed since early 2008 is here to stay-although, if this rate of change is anything to go by, the services on offer to market participants in two years' time will look very different to those available now.

As buy-side and sell-side firms' algorithmic and high-frequency trading (HFT) strategies continue to evolve, the one issue that needs to be addressed above all others is that of latency. Admittedly, latency is less of a concern for certain types of institutions-long-only asset managers with relatively distant investment horizons, for example, tend to focus more on the qualitative aspects of their business as opposed to the speed of executing their investment decisions, but for those shops that have come to rely on their HFT business as their bread and butter, speed is everything. And it is here where co-location-the practice of installing hardware within the premises of an exchange's datacenter-and proximity hosting-similar to co-location, although the hardware tends to be installed in a datacenter near a trading venue, as opposed
to within a venue's four walls-have so much to offer firms intent on shrinking their latency to the absolute minimum.

With this increased demand for hosted services, so too has there been a proliferation in the number of providers offering such services. This is a good thing for end-users in terms of choice, although the expansion is a double-edged sword: Variety is all well and good as long as you are able to exercise discipline when evaluating service providers in order to discern the types of services and providers that best meet your hosting criteria. Remember, the one-size-fits-all maxim very definitely does not apply to this space as financial services firms have different requirements. It's at times like this that you need to exercise caution and check under the hood ... and while you're at it, you may as well kick the tires, too.

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