Consolidated audit trail requirements, trading times (Renee Caruthers, FierceFinanceIT, July 2015)

1. Consolidated Audit Trail requirements would begin to synchronize trading times

By Renee Caruthers Comment | Forward | Twitter | Facebook | LinkedIn


The Consolidated Audit Trail (CAT)’s proposed requirement that market participants comply with a time synchronization standard of 50 milliseconds may not sound like much in an industry where high speed players talk about microseconds and even nanoseconds. But time synchronization experts say even that basic standard would have the potential to give regulators and market participants much more clarity in auditing markets.The CAT, which would give regulators a comprehensive audit trail for tracking market activity, may still be a while away from becoming reality, but some view its proposed requirement for a 50 millisecond time stamping standard as a big step in the right direction.

“That’s a pretty lax standard, but it’s better than what we have – a lot better than what we have,” said Victor Yodaiken, CEO of FSM Labs. “What will happen in the market is as everybody levels up to that, people who have better quality will still have a competitive advantage, but there won’t be as much variation. We have seen places where there is no way to quantify even how badly the time is off.”

Time-stamping is an essential tool for regulators, but it can also be critical for market participants to demonstrate transaction cost analysis or best execution to clients.

“A firm’s ability to measure time gives them the ability to better monitor and analyze slippage, routing structures, and performance,” Larry Tabb, founder and CEO of Tabb Group, wrote in an article titled “When Time Fails: Trading, Tech and Time” this spring.

The Financial Industry Regulatory Authority (FINRA)’s current Order Audit Trail System (OATS) standard requires that all computer system clocks be synchronized to within one second of the National Institute of Standards and Technology (NIST) atomic clock. In a regulatory notice issued in November seeking comment on the CAT proposed 50 millisecond standard, FINRA noted that a minimum 50 millisecond drift would still mean that participants clocks could be as far apart as 100 milliseconds if two systems drifted in different directions.

In a Financial Information Forum (FIF) Clock Offset Survey conducted last winter, out of the 28 firms responding to the survey, 39 percent reported managing clocks that were not at the proposed 50 milliseconds. Even firms whose clocks met the minimum requirement reported significant investment would be required to consistently maintain clocks at that level. The 28 respondents would have to invest $13 million collectively to meet the 50 milliseconds requirement, the survey found.

Yodaiken said achieving 50 millisecond is less daunting than some may think.

“You can pull time off the Internet and get 50 milliseconds. Your Apple Watch will get 50 milliseconds,” he said.

He also thinks it’s a core trading responsibility.

“If you are going to be trading other people’s money, you shouldn’t lose data, you should keep good records, you should monitor what your employees do, you have confidentiality requirements,” he said. “You have all of these requirements and one of them should be that you know how long things are taking.”

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Read more about: Larry Tabb, Victor Yodaiken
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