Tough Time: MiFID II Clock Synchronization Proposals Seen as Too Harsh

The difference between a millisecond and a nanosecond might be indistinguishable to the human eye, but the gap between a thousandth and a billionth of a second could cost the industry loads more money to remain in compliance.

That's the case when it comes to the new Markets in Financial Industry Directive II (Mifid II) rules around clock synchronization. A recent European Securities and Markets Authority (ESMA) proposal asks firms to offer nanosecond-level granularity on time-stamping, a monumental task considering that current requirements are measured in full seconds.

From Bikes to Spaceships

Jock Percy, founder and CEO of Perseus, a connectivity specialist and provider of clock synchronization services, says time-stamping by the nanosecond, which is one-billionth of a second, is possible but extremely expensive and excessive, considering most firms' capabilities at this point.

"That's like trying to go from riding a push bike to piloting an intergalactic spaceship at warp speed," Percy says. "Whilst it might sound counterintuitive for the CEO of a company that delivers our service to say, ‘Hey, that's too far, too much,' we just think that it is."

"That's like trying to go from riding a push bike to piloting an intergalactic spaceship at warp speed," Percy says. "Whilst it might sound counterintuitive for the CEO of a company that delivers our service to say, ‘Hey, that's too far, too much,' we just think that it is."

Percy doesn't think ESMA is wrong in asking for more severe clock synchronization standards; in fact, the academic in him applauds regulators for setting the bar so high. Regulators should try and impose the best possible practices that are technically possible, Percy says.

However, what looks good on paper doesn't necessarily translate well in reality. At this point, the CEO argues, the cost is just too high and could cripple the market, even if the deadline isn't until January 2017.

"You can't punish the marketplace that you serve by putting in something that would be so expensive to deliver at this particular juncture," Percy says. "You would drive people out of the marketplace or make trading prohibitively more expensive by putting in unrealistic expectations."

Pushback

The industry has not taken ESMA's proposal lying down. The FIX Trading Community, an industry-driven standards body, formed six regulatory subgroups around Mifid II, one of which was specifically focused on clock synchronization.

Alex Viall, board advisor for Perseus, says the formation of a working group focused specifically on synchronizing clocks — of which Perseus is a member — shows how seriously all parties involved are about taking the new potential rules.

"The whole basis for this is that the markets are increasingly complex and deep. There is a real need around the monitoring of those markets for extreme accuracy," Viall says. "People on the regulatory side, people on the legal side and people on the audit side all need to be able to go back and reconstruct a trading situation. That's why they are not going to tolerate any inaccuracy beyond what is allowed within the rules."

Two Options

What those rules will be remains to be seen, however. Viall says rumors within the market are that trading venues will need one millisecond granularity while high-frequency trading (HFT) firms will be allowed 100 microseconds divergence from coordinated universal time (UTC) and one microsecond for timestamps.

While the move isn't completely painless and will take time ─ Viall compared it to a snake trying to digest a goat ─ both Viall and Percy believe it's much more manageable than what was originally suggested. It's the equivalent of slowly submerging into a cold pool as opposed to jumping off the high dive.

As for how a firm can synchronize its clocks, there are two main options. Doing it internally means buying roof rights to get a GPS signal, a fiber-optic connection between grand master clocks and plenty of additional hardware, according to Percy.

There is also the utility route with vendors like Perseus. Percy says his firm can physically implement the necessary hardware to meet the requirements in one day followed by a period of up to 30 days for all the necessary pieces to completely synchronize.

"The reality of time synchronization is it will prove to be a benefit for the firms. I think a lot of them have some bad legacy systems that need changing," Viall says. "I think it's just another thing that will make their lives easier, certainly in terms of being able to record and report to the regulators. I think a lot of them are woefully inadequate in their ability to accurately do that and do it very fast. Things like this are actually going to make their lives easier in the long run."

The Bottom Line

· ESMA has proposed that firms have nanosecond granularity in their time-stamping as part of Mifid II.

· Jock Percy, whose firm, Perseus, specializes in providing clock synchronization, says this requirement is too far a jump from where most financial firms' clocks currently are and will cost the industry too much.

· There are rumors that ESMA is willing to back off its requirements and require millisecond- and microsecond-level time-stamping.