They say timing in life is everything. And as the clock ticks down to Mifid II implementation D-day, no financial institution wants to run the risk of leaving themselves too tight for time. Nowhere is this more applicable than under the clock synchronisation rules – which requires banks and exchanges to timestamp trades accurately relative to Coordinated Universal Time (UTC).
The recent decision by UBS to implement time accuracy tools from the National Physical Lab (NPL) to get an accurate time into the building, is a positive step on the path to meeting the devilishly detailed demands of Mifid II. But this is unlikely to be the only measure that the Swiss bank and others will be taking – as sourcing an accurate time is just one element of being in sync with the rules.
Take algorithmic and high frequency trading (HFT). Key decision points in this form of trading, so dominant in equities, need to be recorded to the millionth of a second (1 microsecond, written as 1 µs), with a tolerance of no more than +/- 100 µs. This is no mean feat, considering that many banks will have a multitude of technology applications making these decisions, often running on different technical infrastructure in different datacentres. And it is easy to forget voice trading. Still accounting for a decent chunk of volume across FX and FI, phone conversations also have to be stamped to the accuracy of a second. While this may seem like an age in comparison to the electronic world, it could prove to be even more challenging. After all, it is much harder to gauge when and how a trade has been completed over the phone.
Whether it’s voice or electronic, the real challenge lies in dissecting how trading decisions are made within an organisation and whether this supports ‘best execution’. Can the broker prove that a given trade was executed in the client’s best interest? Was the order completed at the right venue given what the market data was showing at that precise moment? Was the price in line with market consensus? These are all questions that need to be considered. No exchange or financial institution will want to run the very real risk of leaving it too late to deliver a comprehensive solution.
With many institutions already having accurate sources of time, often delivered via GPS, attentions will turn to developing new technologies and processes in order to fully comply with the clock sync requirements. And while many banks and trading venues are already developing sound frameworks, it is the entire industry that needs to be up to speed. One thing is for certain, with January 2018 not long off, only time will tell who is and isn’t in sync with the rules.
Giles Kenwright is head of regulatory advisory at Delta Capita