When 100 Microseconds is Too Long
If MiFID II’s clock-synchronization and time stamping requirements go into effect at the start of 2018 as written, the European Securities and Markets Authority will need to revisit the issue to mandate more precision before too long.
That’s the view of Dave Snowdon, founder and CTO of Sydney-based trading-technology vendor Metamako.
“These regulations provide a good first step because they get everybody thinking about time stamping and synchronization. But the actual numbers that are in there aren’t anywhere close to what is needed to fulfill regulators’ goals,” Snowdon told Markets Media. “They want to be able to piece together what’s happened in the market system globally, to know in what order everything in the trading world is happening.”
Under the European directive, firms and exchanges will need to time stamp various segments of a trade’s lifecycle within 100 microseconds, or 100 millionths of second, of UTC. The regulator’s intention is that such granular timestamps will aid in reconstructing in which sequence orders were executed.
However, MiFID II’s benchmark is not granular enough since exchange response times are already shorter than the margin of error, Snowdon said.
If European exchanges have response times on par with their American counterparts, 80 microseconds and shorter, a firm could enter an order, receive a response from the exchange, do it again, and enter a third order within 160 microseconds.
“All three of those order would be timestamped exactly the same, and it would be completely within the letter of the rules,” said Snowdon. “What it means is that the 100-microsecond accuracy that they specify does not give you any kind of idea of what the ordering of the events in the market was.”
To achieve what ESMA desires, a clear understand of how individual trades unfolded, Snowdon suggests that the regulator restructures its approach and require timestamp accuracy be within 1 or 10 nanoseconds of a venue’s clock instead of within 100 microseconds of UTC.
Snowdon would accomplish this level of granularity by using 10-Gbps Ethernet, which uses 6.5-nanosecond windows to transmit network packets.
“If you had two packets, one after the other, then the time stamps on those packets would be at least 50 nanoseconds apart, the minimum amount of time you can spend sending a packet on a wire,” he explained.
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