In the aftermath of the May 6 flash crash, the Securities and Exchange Commission and Commodity Futures Trading Commission closed ranks, promising cooperative studies and oversight of trading rules and technologies that might exacerbate volatile market swings. On one of those issues – co-location and proximity hosting – the CFTC issued a proposed regulation that has drawn favorable reactions from key derivatives trading constituencies.

Co-location and proximity hosting services afford high-speed access to trading venues. The communications links’ close physical proximity to market centers minimizes latency delays and is therefore crucial to high-frequency trading strategies. Some regulators and market-structure experts have raised questions not only about the potential distorting effects of these high-speed linkages, but also about their fairness, given that they are advantageous to the professional traders who pay for the access.

A preliminary CFTC-SEC staff report 12 days after the flash crash referred to co-location and proximity issues raised in the SEC’s January 21 concept release on equity market structure. But the CFTC was close to an actual rulemaking procedure for the futures industry. As noted in the May 18 report, the CFTC was considering a proposal “to ensure that all otherwise qualified and eligible market participants that seek co-location or proximity hosting services offered by futures exchanges have equal access to such services, without barriers that exclude access or that bar otherwise qualified third-party vendors from providing co-location and/or proximity hosting services.” ....

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