04.28.2016
By John D'Antona

Time Stamp, Data Usage Central in CAT Debate

Timing is everything – as debate centered around the 50 millisecond margin of error being allowed for the timestamps that will mark every trade and quote the consolidated audit trail system records. Also, will the data provided really help the market structure.

Wednesday, the U.S. Securities and Exchange Commission and its subcommittee tasked with its creation publicly unveiled some of its specific plans regarding the building of the CAT, the system being designed to monitor stock market activity and help provide regulators insight into equity market workings. While the actual event was viewed as a formality by many, the debate centered on how accurate the actual timestamps would be that are attached to every data point.

In her opening remarks, SEC Chairman Mary Jo White said the audit trail plan proposes that the initial clock synchronization standard be within 50 milliseconds of the time maintained by the National Institute of Standards and Technology, and that it be reviewed annually to determine whether it remains appropriate.

“There is concern about whether 50 milliseconds is the optimal standard or whether the offset should be more precisely calibrated, as the precision of synchronization may affect the accuracy of the sequencing of events recorded in the consolidated audit trail,” White said. “This element of the proposal is also a significant cost driver that must be carefully considered.  Opinions on the rigor and practicality of various clock synchronization standards and their impacts on our regulatory objectives are of keen interest.”

While White didn’t say the 50 millisecond time “drift” would be permanent, critics of the system immediately pounced on the initial allotment noting if the timestamps could vary by such a differential from the NIST’s timekeeping, the system was flawed before birth. How could a system with such a large time discrepancy be accurate and fulfill the very function that it was created – creating a time sequence of events in the trading markets.

SEC Commissioner Kara Stein was the first to deride the time issue saying that a 50 millisecond differential between clocks would translate into a 5% error rate.

“Why is this important,” Stein began, “It is important because if the various reporting entities have clocks that are up to 50 milliseconds off, it means that the time stamp on orders will not be reliable.”

But James Angel, associate professor at the McDonough School of Business at Georgetown University said the proposal came as expected but the devil in the proposal will be in the details.

“Most of the debate and the proposal itself was pretty straight forward and makes sense,” Angel said. “I am sure that industry will groan at the length of time there will be an overlap between OATS reporting and CAT, as CAT will eventually replace OATS reporting and it will be costly to keep both reporting systems up and running.”

However, he added that the SEC has given the industry and themselves plenty of time to comply with CAT.  He did agree that Commissioner Stein had a valid reason to point out the 50ms clock delay or lack of synchronization standard.

“Given the industry harrumphing that 1 millisecond is not de minimis with regard to the IEX application, it is hard to argue that 50 milliseconds is acceptable for clock synchronization,” Angel said.

In Angel’s opinion, the biggest question raised by yesterday’s approval was how effectively will the regulators be able to use the data? “That is the real question.  Once the data are gathered, will the regulators drown in all the big data and still miss the big problems?,” he told Markets Media.

Yesterday’s vote to move forward with the CAT proposal now opens the proposal for a 60 day comment period open to all. After that, the SEC has 180 days to vote to proceed with the system.

After this comment period and approval, the stock exchanges can finally select a builder of the CAT. Financial Industry Regulatory Authority, SunGard and Thesys Technologies are the three finalists in the competition to build the system, which has been said to cost upwards of $100 million to build and upwards of $2 billion per year to operate.

On July 11, 2012, the Commission adopted Rule 613 of Regulation NMS under the Securities Exchange Act of 1934.  Rule 613 requires the SROs to jointly submit a national market system plan to create, implement, and maintain a CAT that would capture–in a single, consolidated data source–customer and order event information for orders in NMS securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution.

Featured image via BillionPhotos.com

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