How To Explain Colocation and High Speed Data Feeds to Luigi The Barber


We have been asked a lot this week about the meaning of colocation, high speed data feeds and special order types.  While these terms are relatively easy now to explain to industry participants, you should see the look on Luigi The Barber’s face when we tried explaining this to him.

However, we figured out an easy way to explain these terms based on a recent scandal at JFK Airport that the Port Authority inspector general just broke.

Here is what went down at JFK according to the NY Post :

“The defendants are alleged to have accepted bribes in the form of cash payments to rig the airport taxi dispatching system at JFK Airport.  The bribery scam allegedly allowed taxi drivers to basically ‘cut the line’ and get ahead of honest drivers waiting their turn for passengers.

The crooked dispatchers took $10 bribes from hacks who did not want to wait in “taxi hold lots” at the two airports so that they could pick up more passengers and make more money, authorities said.

The dispatchers could make up to $1,000 a day in the scam, the source added.

“They are supposed to send the taxi drivers to a taxi hold lot where they wait two to three hours and they’re dispatched on demand,” the source added.

Instead, they were allowed to go straight to the airline terminal pick-up areas, Brown said.

The dispatchers have total control over the cabs’ movements at the airports, summoning them from the central holding area to pick-up areas at the various terminals as flights arrive.”

So this is how we explained this to Luigi:

– The honest taxicab drivers waiting in line at JFK parking lot are institutional and retail investors.

– The crooked taxicab dispatchers are stock exchanges.

– The crooked taxicab drivers are the high frequency traders.

– The $10 bribe is the colocation fee paid by the crooked cab drivers.

-The $1,000 per day collected by the crooked dispatchers is the monthly colocation fees that the exchanges collect from the high frequency traders.

– The taxicab hold lot is the limit order book.

Themis:  So Luigi, think about it this way:  Colocation, high speed data feeds and special order types offered by the stock exchanges are services that allow traders who subscribe to them the ability to jump in front of your order and cut the line just like those crooked taxicab drivers.  These high frequency traders are essentially paying the exchange for the privilege to cut the line.

Luigi:  But this must be illegal.  The 16 taxicab dispatchers were led away in handcuffs and charged with bribery.  The article said that the “defendants sold out their position of public trust and chose to line their pockets and enrich themselves. The defendants took unfair advantage of a dispatching process that was created to provide a level playing field for all cab drivers.”

Themis: Unfortunately, Luigi that’s were our analogy breaks down.  Colocation, high speed data feeds and special order types are perfectly legal on Wall Street.  But similar to those taxicab dispatchers, exchanges have sold out their position of public trust and have chosen to increase their bottom line to enrich themselves and their shareholders.

Luigi:  Ahh, fuhgettaboutit.