In late September, the most recent MiFID II guidance, detailing the proposed technical standards, hit the shelves. Amongst the many pages that comprise this much-anticipated tome, is a section dedicated to explaining the levels of accuracy that business clocks, used to record the timings of reportable events, will need to achieve (but considering this section is roughly 500 pages in, you’d be easily forgiven if your caffeine and concentration levels had given up the ghost much earlier).
In summary, the new European regulation will require trading venues, their members and participants to synchronise the clocks used to record a reportable event’s date and time. The trading venue’s operators, its members and participants should also be able to define the precise location the timestamp is being applied and ensure this remains consistent. The common reference time will be Coordinated Universal Time (UTC) and the maximum acceptable divergence from UTC, for trading venues and for members and participants for different types of trading activities, has been provided as part of the advice.
However, unfortunately the latest technical standards appear to fall short of actually explaining exactly what will qualify for a reportable event. Fair assumptions can be drawn, but this is just one example of the further guidance still needed and it’s an area that the folks at FIX Trading Community are working on to enable firms to comply come January 3rd 2017.
Meeting regulatory requirements is rarely an inexpensive or easily executable endeavor, with the mere mention of emerging rules often inciting a room of echoing groans. However, the new clock synchronisation rules could offer business benefits beyond the warm fuzzy feeling of being pretty sure you’ve complied and as such are unlikely to be hit with a huge regulatory fine anytime soon. In particular, I feel that by synchronising business clocks, firms may be able to gain greater performance visibility and potentially conduct more effective forensic analysis when a problem occurs.
Enhanced performance visibility
I’ve spent the best part of the last 7 years working with trading venues and their members to help these entities gain a better understanding of where they could be achieving greater performance gains. However, a common issue I’ve come across time and again is that although a trading firm can now measure pretty much every single hop an order or trade may take within their own infrastructure, what happens between the order leaving a trading firm’s gateway and the acknowledgement being received, often remains a complete unknown.
Internally these firms can tie together all of the different elements that led to an order being sent, tracing the path of the data as it moves across their infrastructure and gain really precise timings for every step of the process. They can identify for instance the particular market data tick that generated an algo trading decision that led to the creation of a parent order, which was ultimately executed as a series of child orders. Yet as soon as those orders leave their gateway, nothing! Beyond this point all they can accurately measure is the round-trip order time based on the time the acknowledgement arrives.
That’s not because they don’t receive a timestamp back from the exchange, they most probably do, but because they often have little confidence in the synchronisation of the clock the exchange is using, compared with their own. Because things aren’t all synced up, the fear is that the time difference between the point the order left their gateway and when it was stamped by the venue, may not be an accurate reflection of what really happened.
The requirement for trading venues, their members or participants to synchronise the clocks used to record dates and times for reportable events will potentially allow firms to extend visibility beyond their own boundaries. In doing so, enabling them to much more accurately breakout how long it takes for a message to travel from them to the trading venue and then return. This degree of transparency is likely to drive more performance visibility into the one-way latency achieved, as where a timestamp is required, it will need to be synchronised and precise with a known maximum degree of divergence.
By analysing this additional information and looking out for latency spikes, trading firms could for instance:
- More effectively detect if a certain venue is under stress and take appropriate trading decisions – as ensuring you are trading accurately is essential
- Conduct more informed conversations with the trading venue about whether they are, for example, accessing the exchange using the right gateway for their trading requirements
- Furthermore, if the firm uses a third party connectivity partner to link up to the exchange, a timestamp detailing when an order reached the venue’s gateway could provide more information on that connection, indicating if there is a network, connectivity or application issue.
Therefore, MiFID II’s requirements regarding the synchronisation of business clocks could potentially help firms to further enhance their trading process.
Detailed forensic analysis
As I mentioned previously, some firms can now accurately tie together and measure all of the steps that an order took from receiving the original market data tick, that kicked off the whole process, right through to an order exiting the gateway. Through clock synchronisation, if a trading firm can gain accurate additional timestamps for the hops an order takes, before an acknowledgement is received, all of this extra detail could be correlated with the in-house information already collected.
This means that an order’s entire chain of events could be immediately analysed, and any issues instantly identified and acted upon. If the firm is then able to push these complete chains of trading data and the associated timings to their big data solution, when 6 months down the line someone wants to know what happened, when, and why, the full details of the order could be easily retrieved and examined.
These are just two of the many benefits that I feel the requirement for trading venues, their members and participants to synchronise business clocks could deliver, and I’m pretty sure there are plenty of others.
Whilst all of us recognise that regulation is for the greater good, its nice sometimes to see additional ways that the expense of meeting new mandates could benefit our business in other areas.
This blog was first published by The Trading Mesh
