THE HOAX OF LOSS TO INVESTORS IN CO-LOCATION

Story of FIRST / SECONDARY LOGIN, ABSENCE OF LOAD BALANCER

Imagine a LARGE ground where a VERY SMALL box of goodies keeps appearing somewhere randomly, time and again for anyone to grab (NSE). At the boundary of the ground, there is a SMALL group of professionally trained runners equipped with sophisticated binoculars (HF traders in Colo space) and also a large number of comparatively amateur runners (INVESTORS).

When such a minuscule box of goodies appears randomly anywhere on the ground, who will detect the goodies box and its location first? The ones with sophisticated binoculars or those without?

Who is likely to reach and pick up the box of goodies — the professional trained runners or the amateurs who have speed of a fraction of the professionals (colo latency advantage).

If one of the professional runners has a vantage start (as others from his small group will also have at some other time) and picks up a particular box ahead of others, was it at the cost of other professional runners or the amateurs? If he did not pick it; would it not be picked by some other professional runner. Did the amateurs have a chance at all and were they even interested in such small boxes of goodies (5 paise arbitrage opportunity).

This, in essence, is the colo space. The retail investors were never going to pick up the minuscule algo opportunities. It was invariably to be picked up by ONE OF THE 100 odd colo brokers running their trading strategies.

The retail investors never had a chance and were never in that space. That was the design of Colocation. So even if it is presumed that someone in colo space got some advantage at some time, it could only have been at the cost of another Colo broker.

It needs to be understood here that even outside colo, differential latency is a norm as different kind of connections are available to brokers.

Investors are different from HF Arbitrageurs. Investors, typically, look for large returns over comparatively longer time. The HF Arbitrageurs looks for minuscule returns over extremely short time periods. Both investors and arbitrageurs are necessary in an efficient market.

High Speed Arbitrage plays a key role in enhancing efficiency of price discovery of a security. Arbitrage brings the price difference between buyers and sellers to a very low price — usually 5 paise. Imagine a share trading at Rs. 100 in NSE and Rs. 99 in BSE. The arbitrageur will buy the share from BSE at 99 (leading to price increase in BSE) and sell in NSE at 100 (leading to a price fall at NSE). Till the price is same between NSE and BSE, this process will continue. Such opportunities exist due to different markets and different products related to each stock / basket of stocks.

There are many arbitrageurs in the market and they often compete with each other. Colocation offers traders the fastest way to get price information and fire orders. Retail, institutional and various other investors are not competing against the arbitrageur and are not present in Colocation. In-fact, presence of arbitrageurs makes the efficiency of price discovery better for the market. Investors are able to buy and sell at the price which is common across markets/ market segments without any asymmetry. Such benefit exists for all players, even those who are not colocated. The function of arbitrage is always beneficial for all the players in the market.

Therefore, the question of colocation causing loss to investors doesn’t arise because investors are not even present in that space.

So where’s the LOSS TO INVESTORS? Isn’t it merely a hoax propaganda being pushed with some other motive.