You don't understand.
Allow colocation, but colocation can only happen in say NJ or any distance that is not less than a certain amount from the physical location of the matching engine location. Or leave them in NYC, but then draw a circle of say 10 mile radius around the location of the ECN. No one can be inside that circle. The speed of light will take care of the rest. Once you go outside the city limits of Chicago or NY, it is not that expensive to buy land and colocate racks upon racks of computers to your hearts content. The biggest expense then becomes the enourmous power consumption that these colocation facilities draw. But that is a different issue, and the point is there is plenty of space as long as you can pay. In the current facilities, _EVEN_ if you can pay, there is no more space!
It is not the colocation itself that is the problem, it is the colocation where only the biggest players have the $ and power to colocate. If you are slower by a fraction of a mili second, you are out of the game.
Another possibility is move the matching engines (ECNs) away from expensive city locations and put them in the middle of nowhere. In fact, they should put their computing centers near a waterfall, where they can then use potential energy in the form of gravity+water to power the facility. This is close to free, land is in ample supply. Everyone can be same distance to matching engine because you can build a football sized 10 story warehouse and it costs are trivial. Democracy.
