Based on the recommendations of the Technical Advisory Committee, SEBI had issued guidelines in May 2015 on co-location or proximity hosting services. Through this facility, a broker or a data-vendor can be located within or at close proximity with the stock exchange and can connect to the trading platform through a direct and private network. Since time is a crucial factor for those trading in the securities market, such facility helps brokers to minimise or eliminate delay in the execution of trade orders.
The 2015 guidelines focused on ensuring equitable access to the facility and checking that the facility does not compromise the integrity of the data and the trading system. In a circular dated December 01, 2016, SEBI has amended the guidelines. Brokers may now connect directly to the trading system of stock exchanges through a ‘local area network’. Further, SEBI has permitted direct connectivity between the co-location facilities of recognised stock exchanges, i.e., a brokers’ server placed in the co-location facility of one recognised stock exchange may now enjoy connectivity with the same broker’s server in the co-location facility of any other recognised stock exchange. Further, stock exchanges may utilise the services of third parties to provide the co-location facility. However, the stock exchange shall retain control over matters, and responsibility for the actions of the outsourced entity.
Pursuant to the new circular, colocation/ proximity hosting facilities provided by stock exchanges will become more accessible to brokers and would help improve the environment for brokers employing methods such as high-frequency trading and algorithmic trading.