Compliance

02:45 PM
Donal Byrne
Donal Byrne
Commentary
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Accurate Timestamps for Electronic Trading Are a Must

A debate has emerged with the SEC on the need to collect timestamps on multi-party electronic trading data. But what is sufficiently accurate? Is it seconds, milliseconds, microseconds, or nanoseconds?

I recently read Simon Sinek's book Start With Why. In the opening chapter, he gives a great illustration of how we often draw false conclusions that are confidently held, with data that is incomplete or inaccurate.

    On a cold January day, a forty-three-year-old man was sworn in as the chief executive of his country. By his side stood his predecessor, a famous general who, fifteen years earlier, had commanded his nation's armed forces in a war that resulted in the defeat of Germany. The young leader was raised in the Roman Catholic faith. He spent the next five hours watching parades in his honor and stayed up celebrating until three o'clock in the morning.

Who am I describing?

Most people reading this article would conclude the person in question is John F. Kennedy, but you would be wrong. What if I provided a critical piece of metadata?

The date in question is Jan. 30, 1933.

John F. Kennedy was sworn in as the 35th president of the United States on Jan. 20, 1961. The person described above is actually Adolf Hitler.

This is an important illustration of how adding an appropriately granular and accurate record of the event time relative to the question in hand leads to a completely different conclusion of who did what and what actually happened. Without this critical piece of data, we tend to make conclusions based on what we think we know and what we expect the answer to be. This is very dangerous when people's reputations and businesses are on the line.

On Wall Street, a debate has emerged with the SEC on the need to collect multi-party electronic trading data and to provide sufficiently accurate timestamps. At the heart of this debate is the question of what is sufficiently accurate. Is it seconds, milliseconds, microseconds, or nanoseconds?

To answer this question, we must understand how the collected data will be used and what questions will be asked from the data. If we assume that the primary question to be answered by the SEC's proposed Consolidated Audit Trail proposals is "What exactly happened, and who caused it?," then one has to examine the quality and sufficiency of the data to answer that.

A number of important concepts need to be discussed and understood. First is the requirement to determine the correct sequence of events accurately. If two causal events (A and B) occur, you need to be able to answer this question: Did A cause B, or did B cause A? To determine the sequence of events with sufficient accuracy, one has to determine the time at which each event occurred. The event that happened first can be concluded to be the root cause of the event sequence. The order of events can be determined by creating the event sequence timeline, which requires a simple ordering of the time for all events.

The key determinant for the accuracy of the event time is the frequency of the events of interest. In our case, the fundamental events of interest are executed trade orders. In the US equities markets, the response times for orders placed on public exchanges are of the order of 100 us. The response time for other events, such as the time from a market tick update to an order being placed, is an order of magnitude less (i.e., less than 10 us). The accuracy of time therefore needs to be at least better than the minimum period between events of interest (i.e., 10 us). In fact, this is not sufficient to replicate the event sequence accurately. If we apply the principles from Nyquist sampling theory, we can reproduce with sufficient fidelity (confidence) the event sequence. Nyquist tells us that we need to sample at twice the frequency of the maximum event frequency. Therefore, we need to have a timestamp accuracy of at least 5 us to answer the above questions for all events that happen on US equity markets. This is not a matter of opinion. It is simply the math.

Donal Byrne is the CEO of Corvil, the leading real-time analytics company for monitoring and safeguarding the performance of the world's electronic trading networks. As CEO of Corvil, Donal has been at the forefront of technology innovation and its application to financial ... View Full Bio
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IvySchmerken
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IvySchmerken,
User Rank: Author
9/2/2014 | 10:42:42 AM
Re: Why compromise when the latest technology is available?
In terms of fair access to data, are you referring to the SIP feed vs. proprietary feeds? What type of fair access would you like to see with respect to data and markets?
NJ_trader
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NJ_trader,
User Rank: Apprentice
9/2/2014 | 10:29:46 AM
Re: Why compromise when the latest technology is available?
Speed bumps, or slower markets, are not an option. As soon as a delay is set up, HFT players will find another way to step in front. Fair and equal access to data and markets, though, is an option.
IvySchmerken
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IvySchmerken,
User Rank: Author
9/2/2014 | 9:29:00 AM
Re: Why compromise when the latest technology is available?
I don't think the SEC would put in speed bumps. Recently Goldman Sachs sold its designated market making operation on the NYSE to Dutch high-speed trading firm ICM Financial Markets, suggesting that high-speed trading firms have an increased role in eletronic market making.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
9/2/2014 | 9:12:14 AM
Re: Why compromise when the latest technology is available?
Although there are some people who support slowing down the markets, I don't think most market experts want to see that happen. And, I don't know if the SEC is seriously considering putting in speed bumps or other things that increase latency.

 
Becca L
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Becca L,
User Rank: Author
8/31/2014 | 2:23:26 PM
Re: Why compromise when the latest technology is available?
Regulators would be punishing progress if they slowed the markets because of their own ability to monitor. It's a tough spot for regs, but it's clear they need to put appropriate resources in these seemingly basic problem.
IvySchmerken
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IvySchmerken,
User Rank: Author
8/30/2014 | 11:44:04 PM
Re: Why compromise when the latest technology is available?
In this case, regulators really want the CAT so I don't expect they will ask firms to handle timestamping at a certain speed and then say it isn't necessary. I was raising the idea that the SEC's market structure review could lead to changes in rules which could influence the CAT's timestamping. But, the CAT project has had delays since it was proposed, so in theory, regulators have had more time to think about what they want.
IvySchmerken
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IvySchmerken,
User Rank: Author
8/30/2014 | 10:51:22 PM
Re: Why compromise when the latest technology is available?
I agree, with microwave networks speeding up market data, high speed trading is here to stay. It would not make sense to compromise on the timestamping.
Becca L
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Becca L,
User Rank: Author
8/30/2014 | 6:50:28 PM
Re: Why compromise when the latest technology is available?
Donal makes a great argument. Agreed the fastest interval makes the most sense as high speed trading is here to stay. Hopefully the CAT does a slightly faster job of organizing their own systems...
Becca L
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Becca L,
User Rank: Author
8/30/2014 | 6:50:05 PM
Re: Why compromise when the latest technology is available?
Interesting, point, Ivy. It's frustrating for firms to upgrade their systems and find just afterwards that it's no longer necessary. Regs can get firms to jump through hoops for them, but they must be mindful of this. Resources must be allocated efficiently.

IvySchmerken
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IvySchmerken,
User Rank: Author
8/13/2014 | 3:53:58 PM
Re: Why compromise when the latest technology is available?
If the SEC decides to "slow down" the markets in two or three years via its market structure review, then timestamping at the microsecond level could become unnecessary. Not that anyone thinks that high speed trading is going away...
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