Colocation

A signal moves through fibre at a finite speed, so distance costs time and nothing can be done about it except to remove the distance. Placing a server in the building that houses a venue's matching systems reduces the travel component of latency to the length of a cable inside one room. Venues sell the space, publish the terms on which it is offered, and in most cases equalise cable lengths inside the hall so that no rack is nearer than another.

It explains why financial infrastructure is geographically concentrated. A handful of metropolitan areas host the facilities that matter for currency dealing because that is where the firms quoting currencies put their machines, and every later arrival had a reason to join them rather than sit somewhere quieter. The concentration is self reinforcing: the value of being in a building rises with the number of counterparties already in it.

The effect it buys is real and narrow. It reduces one of the four sources of delay along an order's path and leaves the others untouched, so it does not remove queueing at the venue, processing time inside a system, or the delay a client's own connection contributes. For a client dealing through a firm rather than at a venue, colocation is a property of the firm's infrastructure rather than something the client holds, and its benefit reaches the client only as whatever it does to the quality of the fill.