Colocation
Also known as: co-location, colo, proximity hosting, cross-connect hosting
What is it?
Colocation is renting rack space for your trading server inside the same data centre that houses the exchange's matching engine, so your orders travel metres instead of thousands of kilometres. The reason it matters is that distance is time. A signal in fibre covers roughly 200 kilometres per millisecond, and nothing sends it faster, so physical separation puts a hard floor under how quickly an order can arrive. A colocated server in CME Group's Aurora, Illinois facility reaches the matching engine through a short cross-connect cable in tens of microseconds.
| Where the server sits | Distance to the engine | Round trip | What that speed supports |
|---|---|---|---|
| Colocated cage | Metres, one cross-connect | ~0.05 ms | HFT, latency arbitrage, market making |
| Proximity host | Same metro area | ~1 ms | Execution algos splitting large orders |
| VPS near your broker | Same region as the broker | 5-30 ms | Bots, EAs and copy trading |
| Home broadband | Wherever you live | 40-150 ms | Manual, intraday and swing trading |
The same order sent from a retail VPS in London crosses an ocean and lands roughly 90 milliseconds later - more than a thousand times slower, and no amount of code closes that gap. For you as a retail trader the practical conclusion is not that you need colocation, but that you should stop competing where colocation wins. Any edge that depends on being first - reacting to a print, picking off a stale quote, arbitraging two venues - is already owned by firms sitting metres from the engine. Edges that survive a hundred-millisecond delay, such as a setup you hold for hours, are the ones worth building on.
The retail-accessible version of the idea is a VPS placed near your broker, which shortens your own last hop but leaves the broker's distance to the venue untouched. See /risk-warning.
Why it matters: Colocation puts a firm's server metres from the matching engine, so speed-based edges belong to colocated players and retail strategies have to win on something else.
It does not change your own fills directly, but it decides which strategies are realistic for you - anything whose edge is pure speed is already taken by colocated firms.
Real-world example
CME Group's matching engine sits in Aurora, Illinois. A colocated firm reaches it in tens of microseconds, while the same order from a London retail VPS takes roughly 90 milliseconds.
How SignalBots handles it
SignalBots is built so retail traders do not need colocation: signals are pushed to extensions, connectors and webhooks rather than polled, so the delay you actually control is your own reaction and your broker's fill, not the distance to the venue. See /risk-warning.
Pro tip
If a backtest only turns a profit when fills are instant, treat it as a colocation strategy you cannot run - re-test it with a realistic 100 ms delay before funding it.
Common pitfalls
Assuming a low-latency VPS is colocation. A VPS near your broker shortens your last hop, but the broker still sits far from the venue and that leg is the one you cannot shorten.
Frequently asked questions
Can a retail trader buy colocation?
In principle yes, but the bill covers rack space, a cross-connect and exchange market-data fees, which together run into thousands per month. It also needs direct venue access that retail brokers do not resell, so the realistic equivalent is a VPS close to your broker.
How much faster is colocation than a normal setup?
A colocated cross-connect measures in tens of microseconds. A well-placed VPS measures in single-digit milliseconds, and a home connection in tens of milliseconds. Each step is roughly a hundredfold, which is why the gap cannot be coded away.
Is colocation the same thing as a VPS?
No. A VPS is a rented virtual machine in a general-purpose data centre, chosen mainly so your automation stays online. Colocation is your own hardware in the venue's own building, chosen purely for the microseconds it saves.
Does colocation help if I trade from signals?
Very little. When a setup is held for minutes or hours, the binding constraint is how fast the signal reaches you and how quickly your broker fills it, not the distance between your broker and the exchange.
Would colocation make my strategy profitable?
It removes a latency disadvantage, which only matters if speed was the edge in the first place. A strategy with no edge stays unprofitable at any latency, and your capital is at risk either way. See /risk-warning.
Trading involves substantial risk of loss. Historical and backtested results do not guarantee future performance. Read the full risk warning.
