The exact timings for the introduction of the European Union’s Markets for Financial Instruments Directive (MiFID II) may still be in doubt, but capital market participants must not underestimate the challenge posed by the new requirement for time stamping.
Driven in part by the rise of high frequency trading (HFT) and the need for high resolution, synchronised time stamping to help prevent trading irregularities and aid forensics, precise and accurate timing already plays a vital role in the financial services sector.
However, MiFID II Article 50 and its corresponding Regulatory Technical Standard 25 (RTS 25) mean that every reportable event in a transaction’s lifecycle must be time stamped to millisecond accuracy and granularity:
- HFT market participants must meet the 100-microsecond standard
- Algorithmic participants have to be at 1 millisecond
- Human-powered trading (e.g. RFQ and voice activity) must be accurate to 1 second
With the mandated level of granularity and breadth of data being an entirely different proposition from current levels, there are concerns that the impact of time stamping requirements is being overlooked.
Entirely different proposition
A typical enterprise time dissemination solution consists of a time source, an internal distribution and a time stamping engine. The time source is comprised of the distribution chain from the originating source all the way to the ingress point on the internal distribution. The latter then uses time transfer protocols to feed the time stamping engine.
Such time source feeding systems are unable to meet the required level of granularity demanded by MiFID II, which calls for knowledge of the traceability of the time signal to Coordinated Universal Time (UTC) at each step in the process (delivery, distribution and consumption) for regulatory compliance at the time stamp.
Meanwhile, the satellite-based Global Positioning System (GPS), which is employed extensively as a timing source in the industrial sector, is also unsuitable for MiFID II. This is because GPS is vulnerable to interference, with jamming and hijacking of signals identified as key risks.
From an interference perspective, it is relatively straightforward to jam a GPS signal, with jamming devices readily available online. It’s also possible to spoof GPS signals and submit an alternative clock signal, while other causes of interference include urban canyon effects and solar storms.
Capital market participants face further technology and integration challenges. The ability of a smart order routing system to make decisions on where to route an order relies on synchronised delivery of market information from the execution venues in question. To achieve this, any connectivity infrastructure will need to synchronise quote and order book data from disparate platforms and locations.
Notwithstanding the ability to connect physically, firms will require a comprehensive latency monitoring capability to achieve synchronicity. What’s important here is for firms to ensure that the orders on multiple venues that their execution systems are seeking to hit are not subject to data dissemination latency, which could distort the real-time view of the marketplace and hence the opportunity.
Any latency monitoring system needs to be able to measure market events on a like-for-like basis. These events must be defined in a standard way across a multitude of trading platforms, which may use diverse formats and policies.
Formats and policies will be standardised and highly controlled under MiFID II. This will have a major impact on the configuration of the technical platform that market participants have currently.
Nevertheless, the investment in getting systems up to scratch will be worth it, as reliable transaction data will ensure both market participants and regulators can reconstitute and compare transaction activity across venues and against prevailing market prices to perform execution quality analysis and detect instances of cross-venue market abuse.
Tap into the atomic timeline
For many market participants, it will make sound commercial sense to outsource key capabilities required under MiFID II, especially when they are collocating critical trading applications within a ready-made community of independent service providers. Interxion’s London data centre for example is home to key players such as TMX Atrium, a global capital markets infrastructure provider and distributor of NPLTime®.
Developed by the UK’s National Physical Laboratory (NPL), NPLTime® is a certified precise time signal directly traceable to UTC, the international time reference maintained by 75 time laboratories globally and based on the average of some 450 atomic clocks. It is fully compliant with the MiFID II RTS 25 timing traceability requirement and offers the TMX Atrium community a time signal that completely eliminates reliance on GPS.
Crucially, NPLTime® is delivered over fibre, which means it can be implemented using existing infrastructure. The implementation and additional metrics available provide end user organisations with a core timing capability for traceable time stamping, latency monitoring and synchronisation. It also removes the need for time synchronisation between various locations in the trading infrastructure, further reducing the complexity of time management.
“Traceability to UTC offers the sector the basis of a ‘common clock’ and underpins a developing Consolidated Audit Trail,” says Dr Leon Lobo, Time and Quantum, at NPL. “Realisation of the requirement put forward by MiFID II for high resolution traceable time stamping will enable significant improvements in clarity within and across markets.”
To ensure you make enough time for MiFID II, download our white paper and find out more on preparing to Trade Europe.