How to Maximize the ROI of Colocation

Look, we've all heard the sales pitch: "Get your servers next to the exchanges and watch the profits roll in." But here's what actually happens—proximity alone won't make you money. Real colocation ROI comes from strategic setup and continuous optimization of your infrastructure investment.

Lime maintains a presence in all major US Exchange data centers. Our low latency focused clients have opportunities to co-locate, host or use the Virtual Private Servers (VPS) sitting right next to the Exchange matching engine when trading. We’ve also built a latency-optimized network between co-locations using ultra-low latency technology.

From trader to trader, whether you're dropping thousands or tens of thousands monthly on colocation, let’s break down how to maximize value while avoiding the expensive mistakes that can drain your trading profits. We've been there, made those mistakes, and learned the hard way so you don't have to.

Know Your Latency Needs Before You Blow Your Budget

Here's the thing—not every strategy needs sub-microsecond execution. You probably know this, but matching your infrastructure investment to your actual requirements is crucial.

Is Colocation Right for You?

Colocation services can deliver value to:

• Quantitative and algorithmic traders
• High-frequency trading operations
• Options traders requiring precise executions
• Futures traders in volatile markets
• Professional traders competing with institutions

For these traders, the cost of colocation can often pay for itself through improved execution quality and access to opportunities that simply aren't available with standard retail connections.

Strategies that demand microsecond-level performance:

• Arbitrage trading between venues
• Market making with tight spreads
• Statistical arbitrage with second-range windows
• News-based algorithmic trading

These strategies live or die by speed and are enhanced by premium colocation.

Strategies that can succeed with less demanding performance:

• Momentum trading on breakouts
• Event-driven strategies around earnings
• Multi-leg options execution
• Same-day swing trading

Strategies where premium colocation may make less sense:

• Position trading
• Fundamental analysis
• Long-term systematic strategies

Let's break it down. Before upgrading any infrastructure, establish your baseline performance by:

• Measuring round-trip time to target exchanges

• Analyzing fill quality to see how often orders execute at expected prices
• Calculating opportunity costs by quantifying where faster execution would improve results

The reality is pretty simple: if you can't measure the impact, you can't justify the investment.

Choosing the Right Location Strategy

Location can help determine success, and the wrong choice may waste money while failing to deliver performance benefits. Here's what many people don't realize about U.S. equity trading infrastructure:

The three key data centers:

1. Carteret: Hosts NASDAQ, BX, and PSX
2. Mahwah: Houses NYSE, NYSE Arca, and NYSE American
3. Secaucus: Contains Cboe exchanges, IEX, MIAX, MEMX, and numerous dark pools

Deploying infrastructure in all three locations can be expensive and complex. That's why Lime Trading has built a high-performance mesh network that connects all three major co-location centers—Carteret, Mahwah, and Secaucus—via ultra-low latency fiber and millimeter-wave links.

Optimize Hardware for Performance Per Dollar

Smart hardware choices dramatically improve performance per dollar spent.

FPGA vs. Standard NICs: Field Programmable Gate Arrays (FPGA)-based network cards represent a significant investment but can be worth the premium for sub-microsecond strategies requiring hardware-level processing. However, high-performance standard Network Interface Cards (NICs) often suffice for less latency-sensitive strategies at substantially lower costs.

Server Selection Strategy: When selecting servers, prioritize single-core CPU performance over core count for latency-sensitive applications. Most trading algorithms benefit more from faster individual cores than from parallel processing. Memory speed also matters significantly for real-time applications.

Storage Optimization: Keep active trading data in RAM whenever possible. Use fast SSDs primarily for logs and temporary files.

Connectivity Optimization: Here's what they don't tell you—every meter of cable adds latency to your execution time. Shorter cross-connects to exchanges deliver measurable improvements. Premium low-latency cables cost considerably more than standard versions but reduce signal degradation and network jitter, making them worthwhile investments for latency-sensitive strategies.

Streamline Data Feeds for Speed and Cost Control

Data feed strategy directly impacts both latency and monthly costs. Let's talk money—you want to optimize both simultaneously.

Direct vs. Consolidated Feeds: Direct exchange feeds typically cost significantly more per exchange but deliver data faster than consolidated feeds reach your systems. Consolidated feeds cost less and work well for broader market coverage when absolute speed isn't critical.

The Hybrid Approach (What Actually Works): Many successful traders use a hybrid approach—subscribing to direct feeds for their primary trading venues while relying on consolidated data for market context and secondary opportunities. This strategy balances speed where it matters most with cost control for less critical data.

Feed Handler Optimization:

• Filter unnecessary data at the source
• Cache frequently accessed reference data in high-speed memory
• Process only the market data your specific strategies actually need

Control Costs Without Sacrificing Performance

Colocation costs can spiral without careful management. You probably know the feeling—watching monthly bills climb while questioning whether the performance gains justify the expense.

Typical Monthly Costs Include:

• Rack space
• Cross-connects to exchanges or data providers
• Additional power beyond basic allocations
• Hardware (significant upfront investment)

Cost Control Strategies:

Multi-year commitments often yield substantial discounts for longer-term contracts if you're confident in your location choice. Bundling services typically reduces total costs compared to purchasing rack space, cross-connects, and support separately.

For strategies that need better latency than retail connections but don't require dedicated hardware, shared colocation options can significantly reduce costs compared to dedicated setups.

Managed Colocation Consideration:

Managed colocation services may provide better total cost of ownership by providing 24/7 monitoring with low overhead, leveraging bulk purchasing power for hardware and connectivity, and offering specialized expertise for optimization and troubleshooting.

Track Performance with Key Metrics (The Numbers That Actually Matter)

Successful colocation requires continuous monitoring of performance indicators that directly correlate with trading profitability. Here's what actually moves the needle:

Latency Monitoring:

Monitor round-trip latency including average, median, and 99th percentile measurements to exchanges. Occasional spikes in latency can be as damaging as consistently slow performance.

Execution Quality Metrics (The Real ROI Indicators):

• Fill rate improvements: How often your orders execute successfully
• Price improvement frequency: When faster execution gets you better prices
• Slippage reduction: The dollar impact of speed improvements

System Performance Indicators:

• CPU utilization during peak trading periods
• Network packet loss rates that could indicate connectivity issues
• Regular hardware health checks to prevent performance degradation

Calculate Your ROI with Measurable Results

Let's talk profit. Quantifying colocation ROI helps justify current spending and guide future infrastructure decisions.

Consider how reduced latency might enable you to capture additional trading opportunities or improve execution quality. Even modest improvements in fill rates or slippage reduction can generate substantial returns when applied to significant trading volumes.

The ROI Reality Check: Successful traders regularly measure whether their infrastructure investments deliver returns that exceed their cost of capital. Scale up your colocation investment when you can demonstrate consistent positive ROI and identify missed opportunities due to infrastructure limitations. Scale down when returns don't justify costs or your trading strategy shifts to longer timeframes where speed advantages matter less.

Protect Your Investment with Security and Reliability

Infrastructure failures don't just cost performance—they can wipe out months of profits in minutes. We've seen it happen, and it's not pretty.

Security Essentials:

• 24/7 armed security
• Biometric access controls
• Visitor escort requirements
• Locked cabinets and remote monitoring

Network Protection:

Network segmentation isolates trading systems from corporate networks and internet-facing systems. Encrypted communications protect data sent to trading infrastructure. Regular vulnerability assessments and patching help identify security risks before they become expensive breaches.

Reliability Planning:

Hot standby systems enable failover within seconds of primary system failures. Geographic redundancy protects against facility-wide outages that could shut down trading operations entirely. Define your recovery time objectives based on your trading strategy's sensitivity to downtime, then design infrastructure to meet those requirements.

Future-Proof Your Colocation Investment

Markets and technology evolve rapidly. Build flexibility into your infrastructure to adapt to changing conditions.

Strategic Planning:

• Plan hardware refresh cycles regularly as technology advances
• Monitor exchange location changes and new venue launches
• Stay informed about regulatory changes affecting colocation access, pricing, or operational requirements
• Consider emerging virtual colocation models and hybrid cloud integration

The most successful traders treat colocation as a living component of their overall strategy that evolves with market conditions rather than a one-time infrastructure decision.

The Bottom Line on Maximizing Your Colocation ROI

ROI from colocation comes from smart, data-driven decisions rather than simply proximity to exchanges. Match your infrastructure investment to your actual strategy requirements, focus spending on measurable performance improvements, and monitor results continuously to identify optimization opportunities.

Calculate and track ROI regularly using concrete metrics like fill rate improvements, slippage reduction, and additional opportunities captured. If your colocation setup isn't delivering quantifiable returns that exceed your cost of capital, it's time to optimize your approach or reconsider your infrastructure strategy.

The best colocation investments create sustainable competitive advantages that compound over time, turning infrastructure costs into profit drivers that justify themselves quarter after quarter. When you combine strategic infrastructure planning with rigorous performance measurement, colocation becomes one of the most powerful tools for trading success.

Ready to optimize your colocation ROI?

Colocating near your target exchange and leveraging Lime's low-latency network can give you the edge needed in today’s fragmented and fast-moving markets.

Discuss the Lime’s Hosting and Colocation Services solution that will best fit your strategy with our team -> https://lime.co/lime-hosting-and-colocation/

Trade smart.

© 2025 Lime Trading Corp. Member FINRA, SIPC, NFA. Past performance is not necessarily indicative of future results.

All investing incurs risk including, but not limited to, the loss of principal. This material in this communication is not a solicitation to provide services to customers in any jurisdiction in which Lime Trading is not approved to conduct business. The material in this communication has been prepared for informational purposes only and is based upon information obtained from sources believed to be reliable and accurate; however, Lime Trading Corp. does not warrant its accuracy and assumes no responsibility for any errors or omissions. The information provided is not an offer to sell or a solicitation of an offer to buy any security or a recommendation to follow a specific trading strategy. Lime Trading Corp. does not provide investment advice. This material does not and is not intended to consider the particular financial conditions, investment objectives, or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.