There has been a lot in the media recently on the co – location issue at NSE, preferential access, dark fibre and so on.

But let’s try and understand what actually happened and what the issues are in layman terms.

Algo trading requires 3 critical elements to function
– Co-Location where brokers can place their servers, which are connected to the trading system of the exchange
– A pre requisite is that the exchange has high liquidity, anonymous order matching, and robust technology for trades to be executed fast
– Market feed of each order pumped into the trading system, which the exchange provides to brokers and the latter use different technology to collect that data from the exchange’s server to their back office

While the first two elements are provided by a good, robust exchange venue, the last one requires a combination of exchange’s capability to disseminate and brokers’ capability to receive the same. Properly receiving every change in order book is very crucial for building an order book at brokers’ end and accordingly they take a decision to trade on the same, through a different channel of the exchange, other than the one through which data is disseminated.

Dissemination of market feed data can be done using either of the following mechanism
– TCP/IP, popularly called unicast or
– Multicast

In technology parlance these are two different methodologies of disseminating data with a basic difference in the approach. TCP/IP ensures that all the complexities of dissemination lie with the sender while Multicast ensures that the same lies with the receiver.

In layman’s language TCP/IP is a one to one communication i.e. sender sends the copy of the same message to every receiver in a sequential fashion. Sender takes care of ensuring that receiver is available and has received the data, this is done by two way acknowledgement mechanism between sender and receiver. Sender also ensures that data is sent in an ordered fashion i.e. if message 1 is sent it will be followed by message 2 and the sequence of receipt also will be the same. These checks and balances in the protocol, increase the complexity on the sender’s side and also adds in additional latency. However it makes receiver side application (i.e. brokers’ side) very easy to implement and it need not worry about any of the network complexities. A simple implementation also ensures that the up time of the application will be very high, a critical requirement in the high frequency trading world.

I was told all major exchanges in the world started with unicast and gradually moved to multicast when their brokers’ capability handle technology matured. NSE has done the same and moved to multicast in May 2014. The time differential in giving data sequentially is so tiny that even in HFT world it does not bestow any benefit to brokerages receiving first. That’s the reason why the technology was used by all exchanges across the world.

Now about all the noise being made about the so called ‘dark fibre’. Let’s first understand what dark fibre actually means. There’s nothing black, evil or dark about the fibre. It’s just an operated optic fibre network (similar to the ones owned by traditional carriers) not owned by the network service provider, but purchased or leased from another supplier. So there is nothing sinister about Dark Fibre. When optic fibre are not in use, they are called dark fibre, because light does not run through them.

So what is this hullaballoo? It is nothing but imagination running amuck. Broker servers in colocation need to be controlled/ serviced by brokerages running algos. As they cannot physically sit in colocation, they need a connection to their office. This connection is provided by various telecommunication providers. Initially NSE authorized some 5 telecommunication service providers for co – location services. Subsequently sometime in 2013, NSE allowed any telecom service with proper DoT registration to do this job. So any service provider with DoT license could provide the connection. There are hundreds of such connections. It is just a routine connection. This connection has no bearing on trading as it has nothing to do with the NSE trading engine.

The term dark fibre was originally used when referring to the potential network capacity of telecommunication infrastructure, but now also refers to the increasingly common practice of leasing fibre optic cables from a network service provider, or, generally, to the fibre installations not owned or controlled by traditional carriers. A dark fibre network is a privately operated optical fibre network that is run directly by its operator over dark fibre leased or purchased from another supplier.”

The main public telecommunication network all over the world including India is mostly optical fibre now. Sometimes internal cabling is copper and in some cases handouts are copper based. Even copper wiring now a days is capable of handling data transfer at 10 gigabytes, nothing to scoff about. Incidentally, I am told, that is the speed NSE supports in colocation now.
Let us recapitulate to understand how futile the debate is;
• So called dark fibre connection is between broker server in colocation and broker office wherever it is located.
• This is for control purposes
• It is not in the trade/order or market data path
• I understand NSE accepts about 2,00,000 order messages every second, that is, a new order or modification or cancellation every 5 micro seconds (1000 micro seconds make a millisecond and 1000 milliseconds make a second. That is micro second is 1 millionth of a second).
• When one is connected on a wide area network (WAN) over public telecom network, latencies are in milliseconds.
• So price information flowing on so called dark fibre is actually ancient history.
• Even assuming that some brokers were trying to use the information for commercial purposes, price and quantity would have changed a few thousand times by the time original information is received and read at a broker’s office.

The issues of co-location and dark fibre pertain to the period of 2010 to 2015. SEBI is working on the matter and under the new leadership is taking it to logical conclusion. The matter is extremely technical and needs to be examined by experts which I am sure SEBI is seized of. However, the endless media debates without understanding the intricacies, we end up damaging one of the most transparent institutions built in the last few decades, NSE which could have an adverse impact on Indian markets and economy, in addition to delaying the impending IPO.

I also agree that if anyone has taken undue advantage of a situation and benefitted unduly from it by unfair means, they should be brought to book. It is important for any exchange to provide a fair and flat playing ground to all participants.

I hope there is now some ‘light’ on this ‘dark’ debate.