Quote from PocketChange:
The advantage HFT co-located traders have are near instantaneous executions of market orders.
#1 The order matching algo's used by the exchanges gives the highest priority to Market Orders.
#2. Co-location provides access to the least delayed DOM data. They will see a new resting order of a remote trader before the trader gets their order confirmation.
#3. They have the ability to bypass Exchange based order matching of limit orders - cut in line and get an instant fill on market orders projected against their faster snapshot of the DOM data.
#4. They limit their exposure to risk of slippage to 10ms or less based on their low latency updates of Level 2 data.
#5. The entire order execution process is low latency. By the time the remote trader gets their order confirmation they have already execute and cleared the trade and probably up to 30 more.
#6. They have a speed advantage to keep offers on the exchange order books and quickly cancel and replace.
#7. They do not need to use broker simulated orders. ie trailing stops as they can do it themselves.
The competitive advantages of co-location are open and available to all traders at minimal costs.
