In August this year, UBS signed an agreement with the National Physical Laboratory in the UK to implement its time accuracy technology, ahead of regulatory synchronisation reporting requirements. The technology was described as ‘atomic’, with the laboratory currently operating two of the world’s most accurate clocks - accurate to one second every 158 million years.
The global co-head of equity electronic agency trading at UBS, Chris McConville, said at the time the clock would “provide UBS infrastructure with a stable, accurate and resilient time signal, whilst simplifying the MiFID II time synchronisation traceability requirements.”
Under MiFID II, all trading members are required to synchronise their business clocks used to record data and time stamp the exact time of all transactions. The clocks needs to be synchronised to coordinated universal time (UTC), with the level of granularity for time stamps dependent on a firm’s trading activity.
The European Securities and Markets Authority (ESMA) defines algorithmic trading for this particular rule as a transaction where a computer has been used in the decision making process - whether that’s deciding which venue to trade on, when to trade or at what price.
If a firm does more than two algorithmic trades a second in the same liquid instrument, then it is also defined as algorithmic or high frequency trading (HFT). In addition, any firm sending at least four messages per second across all instruments being traded on any given European venue is also regarded as HFT. This may not reflect Michael Lewis’ ‘Flashboys’ interpretation of HFT, but ESMA has kept its definition pretty broad.
In the first draft of the regulatory text on clock synchronisation, ESMA required HFT firms to synchronise their business clocks to one nanosecond – or one billionth of a second.
Quicker than a Hadron Collider
To put this in perspective, 1000 nanoseconds make up just one microsecond. Even the Large Hadron Collider in Switzerland just about managed to synchronise its measurements to within nanosecond accuracy…
Following an understanding that this level of granularity could be quite difficult to achieve, ESMA rewrote the regulatory text and now requires HFT business clocks to be synchronised to within 100 microseconds. Companies that use the RFQ model, voice trading or any transaction involving human intervention, must synchronise their clocks to within one second.
“The clock synchronisation rules are about the regulators being able to understand the precise timing and relative ordering of trades,” says head of investment banking regulatory practice at Delta Capita, Giles Kenwright.
“It’s in response to the development of high frequency trading over the last 10 years and more specifically the flash crash in 2010 when it took several months for regulators to piece together what had actually happened.”
Algorithmic and high frequency trading is moving incredibly quickly and is in fact getting faster. Australian company Metamako is able to route incoming information to trading servers in four nanoseconds and is able to lower the time it takes to execute a full trade to just 85 nanoseconds.
The flash crash in 2010 saw regulators struggle to piece together what had happened because the trades were time stamped to one second, but during this time there were thousands of trades executed at a variety of prices.
Regulators now demand time stamping on every single transaction and seek industry-wide clock synchronisation because if trades aren’t stamped to an accurate time, there is no real way of knowing the order of transactions on venues – so it seems logical to synchronise business clocks and time stamp trades.
David Murray, chief business development officer at Corvil, views the reasons behind implementing such precise rules as reasonable: “The clock synchronisation requirement is all about sequencing and reconstruction,” he says. “Regulators are trying to accomplish the ability to reconstruct markets so that they can detect abuse, for example.”
Anna Westbury, director of regulation and market structure at Tradeweb, gives a similar opinion and explains the regulators consider that accurate time stamps, “will aid the creation of a consolidated tape and market surveillance… venues and firms must establish a system of traceability to demonstrate they are in line with that.”
The reasons behind the strict rules of clock synchronisation under MiFID II make sense from a regulators perspective, but the regulatory text has left some firms wanting further clarification to ensure compliance before the 3 January 2018 deadline.
Non-automated trading firms - particularly those in fixed income markets where this method of trading is more prevalent – are required to time stamp transactions to one second. This means the trade needs to be stamped then and there, at the exact point it is transacted.
This presents an industry-wide challenge of figuring out at what point a trade is conducted, with this largely depending on a firm’s process. The FIX trading Community has notoriously fought for regulators to provide further guidance on this issue.
Kenwright considers this the biggest clock synchronisation challenge facing the industry. It’s all well and good stamping traffic between servers, but firms must be aware of the point at which a trade is effectively made. Different companies have different processes and so a time stamp could occur at various stages of a trade’s lifecycle, according to which organisation is time stamping it.
“ESMA needs to clarify where to time stamp, especially when you are dealing with such precise time periods,” says Murray. “Do we stamp when the computer sends the order or when the application confirms it? Perhaps a system has made a decision several nanoseconds before it is communicated.”
Questions have been raised by market participants about the specifics of the rules and urged ESMA for further clarification, but firms are working to ensure their clients are ready. Tradeweb explains to The TRADE that it has been working hard to ensure market participants are aware of this.
Westbury says that Tradeweb has been actively engaging with “buy-side participants, the FCA and other platforms to give a clearer message on clock synchronisation to our users”.
Technological and logistical challenges
Firms face technological and logistical implementation challenges ahead of the clock synchronisation deadline. Some market participants believe technology is not advanced enough for the level of granularity required, while others worry about the cost implications.
Guy Warren, chief executive officer at ITRS, describes implementation as a burden on the industry due to the high level of accuracy, analysis and monitoring required.
ITRS provides a monitoring tool helping firms prove they are compliant. This is carried out on various levels from monitoring computer systems, watching specific trading applications and through to a transaction’s journey to a smart-order router or gateway.
The company also provides analytics for regulatory reporting, picking up discreet points through the trade’s lifecycle and ensuring the systems are healthy. If there is a problem, ITRS can flag this and deal with it when possible.
“The majority of firms are synchronising their servers to NTP [network time protocol] services, but now they must be permanently synchronised to external global clocks with a high degree of accuracy, and they must know whether the synchronisation has drifted or failed,” Warren adds. “IT systems aren’t geared up to do that today, it’s quite a burden on the industry.”
He believes there is not only an issue with ensure accurate time stamping, but also with ensuring the clock synchronisation is completely accurate – something which technology firms are not quite able to do yet.
“Knowing if a firm is in breach of the regulation will be difficult because it’s not very easy to know for sure if you are synchronised. ITRS has one the fastest monitoring tools out there and even we can’t quite achieve micro second analysis. Firms would need to spend all of their time analysing this,” Warren explains.
Technology being too inadequate to cope with the precision required under the clock synchronisations is echoed across the industry. Corvil’s Murray echoes this and also touches on the cost implications for firms.
“Time stamping is an issue because some systems today do not have the ability to record events at that level of precision accuracy. It requires firms to change applications, to log transactions differently or even change databases to expand the field to hold longer time stamps,” he says.
Kenwright, also believes - from a technological perspective - the methods used in software to time stamp often aren’t precise enough to meet the new regulatory requirement. The time lag when making a software function call could mean the time returned is not accurate, to within one millionth of a second.
He explains that a bank that spoke with Delta Capita about clock synchronisation was considering voice recognition software that pinpoints exactly when a trade is completed – something of an issue for many as previously discussed.
Kenwright views this as overkill, but believes if the banks that perhaps do go down that route can prove the stamps are accurate then it’s a good method, but this would depend a lot on the bank’s infrastructure.
In fact, not all participants view the regulation as a necessarily technical challenge, as managing director and global head of business development at Tradeweb, Simon Maisey, explains.
He says that synching all systems to time stamp everything is challenging from a technological standpoint, but “Tradeweb already provides a timestamp for transactions. For the buy-side the issue is whether all of your systems and decision-making processes have the required level of granularity.”
Tradeweb is not the only company looking into time stamping for clients, as Murray explains, Corvil has been using precise technology around time stamping and maintaining the integrity of clock synchronisation.
Corvil’s clients realise regulations are a starting point and will evolve, so as the granularity of clock synchronisation and time stamping increases new technologies will need to deployed – and this will cost firms money, Murray explains.
However, he highlights that the costs of implementing will vary according to the level of granularity, although they can be significant as companies may find themselves having to modify hundreds or thousands of applications, deploy different hardware, or rewrite codes.
“Like most compliance, clock synchronisation carries a heavy cost and it is a burden to put this in place,” he explains.
Similarly, Tradeweb’s Maisey believes trading platforms complying with the rules is not the problem, but costs increasing massively depending on the level of granularity required under the clock synchronisation rules.
Although he reiterates the requirements need to be proportionate and apply the appropriate granularity – which he describes as a logical and sensible way of doing it.
There is light at the end of tunnel as Murray considers firms will gain a valuable source of data following the implementation of time stamping.
“By achieving this level of precision and forcing participants to develop a clear record of each transaction, what their systems were doing and when orders were executed, they wind up with rich transaction and order database that is hard for companies to compile,” he says.
“This can be a valuable source of intelligence for market participants if it’s used in the right way – to analyse symbol pricing at various venues, to examine outstanding orders at any given time or to evaluate broker effectiveness for the buy-side.”