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?

The second concept we must understand is that timestamp accuracy is not the same as timestamp precision; a timestamp may be precise but not accurate. Precision means the minimum time increment that a timestamp can record. (Note: Precision is often used interchangeably with granularity.) Accuracy is a measure of whether the timestamp is correct or not. Precision is a necessary but not sufficient condition for accuracy. It is not possible to have a level of accuracy that exceeds a corresponding level of precision.

For us, this means that we need a level of timestamp precision that is at least as good as the level of accuracy we expect. From the above analysis, we can conclude that, for electronic trading in US equities, we need timestamp precision of at least 5 us. In practice, we need it to be 1 us or better. However, it is critical to understand that simply having precision timestamps associated with collected data is the easy part of the problem. The harder part is assuring the accuracy of the recorded timestamps such that, when we look to recreate the event timelines or determine the relative time between two events, we can do so with confidence and trust the results.

Deriving accurate time happens at two levels:

  1. Relative time accuracy
  2. Absolute time accuracy

Relative time accuracy implies that the timestamp is accurate relative to some other time event. For example, the latency between a market tick update and the placement of an order can be determined using relative time. We just need to know the time difference between events. Determining relative time does not require synchronization of all timestamps to a precision global time reference such as UTC (as defined by the NIST). However, absolute time accuracy does require synchronization of all timestamps to a global time reference. Absolute time accuracy is often preferred but harder to achieve, since everyone must be synchronized to the same reference time source.

Practically speaking for the levels of precision and accuracy we need, this means connecting to a master clock, most likely via a radio antenna to GPS, and then distributing the clock via Precision Time Protocol (PTP), the IEEE 1588 standard, to the actual trading machines. Accurate absolute time is the ideal, since it allows us to answer a greater variety of questions across all events that occur. This should be the goal.

In the case of US equities, we conclude that all buy-side, sell-side, and exchange trade data should be provided with less than or equal to one-microsecond precision timestamps and with absolute time accuracy of less than or equal to five microseconds to meet the needs of today's electronically traded US equities markets.

What happens if we don't do this and we continue with the currently proposed compromise between Wall Street and the SEC -- time accuracy in the low seconds range? As illustrated at the beginning of this paper, the cost of incomplete data or inaccurate time qualification is false conclusions on what happened, why it happened, and who is responsible. Lack of sufficiently accurate timestamps will likely cause innocent parties to be accused of financial mishap and potential wrongdoing. It will likely cause false explanations for critical market events. Finally, it will retard true understanding of market operational dynamics and the evolution of the US equities markets. This is not good for Wall Street, and it is not good for the SEC.

Why can't we get accurate timestamps for the trading data? Wall Street says such a requirement would introduce an excessively burdensome level of complexity and cost. All machines and software would have to be retrofitted with precision timestamping capabilities, and accurate time synchronization would have to be distributed via costly technologies (PTP) to all connected machines trading US equities. Yes, this is true if you follow this approach, but it's neither the easiest nor the least expensive way to achieve the goal.

It turns out that timestamping, time synchronization, and real-time data collection have come a long way over the past five years since the peak of high-frequency trading in 2009. First, it is not necessary to touch any software on any machines. One can do it all with timestamping of the network data; you can tap the network pipes that carry the electronic trading messages and timestamp the messages directly off the wire. In fact, this is superior for a variety of use cases, including risk mitigation and anomaly analysis. Nanosecond precision timestamping now comes standard in equipment from leading network vendors like Arista and Cisco.

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: Moderator
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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