International Financial Services Centers Authority(IFSCA) on 23 June, 2023 has issued directions regarding Co-location facility offered by the Stock Exchanges. The circular defines co-location as the facility provided by stock exchanges that allows eligible market participants to locate their trading or data-vending systems within or in close proximity to the premises of the stock exchanges. The participants can then connect to the stock exchanges’ trading platform through a direct and private network.
To ensure fair and equitable co-location services, the circular mandates that stock exchanges must provide such services within the limits of available space, power, cooling, and other facilities. The regulations apply to three scenarios: data centers owned and managed by the stock exchange, data centers owned by the stock exchange and managed by a third party, and data centers owned and managed by a third party with an outsourcing or contractual arrangement with the stock exchange.
Access and Connectivity
The circular emphasizes that all eligible market participants who avail the co-location facility should have fair, transparent, and equitable access to facilities and data feeds provided by the stock exchange. Participants should experience similar latencies for the class of co-location service provided by the stock exchange. The size of the co-located hosting space should be sufficient to accommodate all interested market participants.
Stock exchanges are required to promptly decide on requests for availing the co-location facility and communicate the decision within fifteen working days. In case of rejection, the stock exchange must provide written reasons for the decision to the eligible market participant.
Connectivity is an essential aspect of co-location services. The circular allows eligible market participants to receive data feeds from other recognized stock exchanges at the co-location facilities and route orders to other recognized stock exchanges in the IFSC or overseas. It also permits direct connectivity between co-location facilities within the IFSC or with other recognized stock exchanges worldwide. Overseas market participants are allowed to connect to the co-location facility of the stock exchange. Additionally, third-party data centers or service providers chosen by eligible market participants can connect to the co-location facility, including advanced managed Infrastructure as a Service (IaaS) co-location solutions and cloud-based co-location services.
Disclosure of Information and Fee Structure
Stock exchanges are required to publish comprehensive information about co-location services on their websites. This includes details about space, power, cooling, data access, market connectivity, technology, technical support, telecommunications, and related products and services. The fee structure for each service, terms and conditions, different types of latencies, allocation procedures, and requirements for third-party providers of co-location services must also be disclosed.
The circular emphasizes the need for transparency in the fee structure. Eligible market participants should be able to estimate their expenditure based on detailed fee information, including whether services have fixed or variable fees and any financial incentives or disincentives offered by the stock exchange.
Managed Co-location Services
To facilitate small and medium-sized broker-dealers who face challenges in availing the co-location facility, the circular introduces the concept of “Managed Co-location Services.” Under this scheme, eligible vendors are allotted space or racks in the co-location facility by the stock exchange. Vendors are responsible for providing technical know-how, hardware, software, and expertise to broker-dealers, including maintenance and troubleshooting services. The stock exchanges will supervise and monitor these facilities on an ongoing basis.
Integrity, Security, and Latency Measurement
Stock exchanges must implement suitable mechanisms for access control to protect their systems and market participants’ systems at the co-location facility from unauthorized access. Guidelines for access and conduct of personnel in the stock exchange premises, including co-located spaces, should be established. Access to the stock exchange’s trading platform and databases should not be granted to market participants’ personnel.
Latency, measured as the time taken to complete the round trip from the core router/switch to the matching engine and back, is an important consideration. Stock exchanges are required to publish quarterly reports on latencies observed at the exchange, including minimum, maximum, mean latencies, and latencies at the 50th and 99th percentiles. A reference latency, indicating the time taken for an order message to travel between a reference rack in the co-location facility and the core router/switch, must also be provided. The circular emphasizes equitable treatment of market participants with the same class of latency access.