Arbitrage traders go high-tech, with co-location facilities

Several broking firms specialising in arbitrage trading have taken a co-location facility provided by stock exchanges at their premises, allowing them to capture inefficiencies in prices automatically, based on pre-defined strategies.

A co-location facility is a data centre with racks for computer servers. It allows brokers to host their servers near the exchange’s trading platform, facilitating faster execution of trades due to low latency in data transmission.

Firms such as CNB Finwiz, BLB Ltd, IKM Investor Services, OPG Securities and Adroit Financial Services, which specialise in arbitrage trading and jobbing, have taken racks in a co-location facility of National Stock Exchange (NSE).

“A co-location reduces time lag in data transmission from Mumbai to Delhi. We are using this facility mainly for arbitrage and algorithmic trading,” said Vikram Rathi, executive director of Delhi-based BLB Ltd.

Arbitrageurs attempt to benefit from price inefficiencies in the market by making simultaneous trades that offset each other and generate risk-free profits. Jobbers buy and sell securities with the intent of generating quick profits.

“In liquid stocks, firms which do arbitrage trading using co-location have an advantage over manual operators,” said an official of CNB Finwiz, who did not wish to be named. Arbitrage trading firms which have taken a co-location facility employ various pre-defined strategies such as relationship between two segments (cash and derivatives), pair trading between two scrips and options strategies. Multiple trades get automatically executed the moment parameters specified in these strategies are fulfilled.

“These are high-frequency trades based on simple hit to hit strategy and works on very low latency,” said J P Gupta, director of Symphony Fintech, a firm providing trading solutions to brokers.

Arbitrage trading firms which have taken a co-location facility are also hiring in a big way. For example, in April, CNB Finwiz had posted a vacancy for 50 arbitrageurs on a job portal for programme trading, using the firm’s NSE co-location server.

NSE was the first exchange to offer co-location facility to its members in August 2009, while the Bombay Stock Exchange started it early this year. Hardware cost for a full rack server in a co-location facility comes to about Rs 50-60 lakh. Apart from this, NSE charges Rs 20 lakh per rack and an annual fee of Rs 2.5 lakh for information technology services. For a half-rack, it charges Rs 8.5 lakh plus a Rs 1.5-lakh annual fee. The exchange also charges a one-time initial set-up fee of Rs 1 lakh and Rs 50,000 for full and half-racks, respectively.