This study examines the impact of allowing traders to co‐locate their servers near exchange servers on the liquidity of futures contracts traded on the Australian Securities Exchange. It provides evidence of an increase in proxies for high‐frequency trading activity following the introduction of co‐location. There is strong evidence of a decrease in bid–ask spreads and an increase in market depth after the introduction of co‐location. We conclude that the introduction of co‐location enhances liquidity. We conjecture that co‐location improves the efficiency with which liquidity providers (including market maker high‐frequency traders) are able to make markets. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark