"It's 9:30am... Do your trading systems know what time it is?"
Okay, admittedly this adaptation of the meme inspired by the famous public service announcement from the 1970s is somewhat stretched. However, it does capture the spirit of one of the key requirements of the latest round of electronic trading regulations. In Europe, MiFID II is finally in full force and, in the U.S., the CAT is rolling out - the SROs are already submitting data, and their members must start doing so later this year.
The most novel aspect of these regulations is their relentless tightening of the levels of accuracy they demand of recorded timestamps. Not surprisingly, this aspect also turns out to be one of the most challenging to satisfy. Not only has this been our direct experience with our clients, but it was also borne out during a webinar in which we took part this week.
Intelligent Trading Technology hosted a panel via webinar on best practices for timekeeping in service of regulatory compliance; I discussed this topic with three other industry experts, namely Rory Chisholm of UBS, Hugh Cumberland of Cumberland Caine, and Russell Lowes of Metameko. We had a broad-ranging discussion, moderated by Sarah Underwood of A-Team Group, and tackled many different angles of this challenging topic.
We started with the essentials: "what are the key regulatory drivers?" The main thrust of these regulations is to construct a comprehensive audit trail of the true sequence of market events. Whether the Regulators are determining the root-cause of a flash-crash, or assessing whether a market participant engaged in spoofing, such an audit trail is the foundation of their ability to assess who is responsible, and to ensure they take the appropriate actions to prevent future occurrences. The reason the audit trail can serve as this foundation is that it records the causality inherent in the sequence of events - but it does so only to the extent that the timestamps on which it is built are precise and accurate.
Some of the questions elicited a fairly technical discussion, from the minutiae of the timekeeping requirements imposed by the regulations, to a review of the technologies that are used to meet those requirements. However, the most interesting part of the discussion revolved around the outstanding challenges to compliance. The one that we have seen most deeply affect our clients is that of UTC traceability: it’s one thing to set your clocks so that, in answer to my opening question, your trading systems do know what time it is. However it’s a much harder problem to demonstrate that the clocks are correctly synchronized to UTC and that they stay that way. I’ll spare you the details here but suffice it to say that it’s difficult enough that we’ve developed a solution specifically to help address this problem.
Not only did the panelists convey a wealth of perspectives on this and other challenges, but a spontaneous poll of the audience cemented the relevance of this question: over one third of them responded that they are either only somewhat compliant, or are not compliant at all, with the MiFID II timekeeping requirements. Although perhaps surprising, this result is not indicative of complacency on the part of the respondents: another poll showed that over three quarters of them are sourcing solutions for clock-synchronization and timestamping either entirely in-house or from a mixture of in-house and vendor capability. The significant proportion of reliance on in-house solutions reflects how seriously participants are taking the regulations.
Personally I found the most interesting aspect of the discussion to be the questions around the benefits of clock-synchronization and timestamping beyond compliance. Of course, this is a topic close to our hearts at Corvil: we have long valued the use of accurate timestamps in safeguarding business in a world that runs increasingly on computer-driven automation and a new reality of time across all industries. We have seen the benefits of precision timekeeping in enabling trading firms to establish a competitive edge and develop sophisticated strategies in a world of fragmented liquidity. We have also seen how important good timekeeping is for cyber-security: since timekeeping is the foundation of a meaningful audit trail, it is what enables auditability, accountability, and full forensic analysis of the origin and evolution of cyber-attacks.
It seems the webinar audience also shares our appreciation for time-keeping: two thirds saw either significant business or significant operational benefits (or both) of clock-synchronization and timestamping.
So, returning to my original question, perhaps it really is a public service to ask, nay demand, “Do your trading systems know what time it is? And, can you prove it?”