Why Clock-Watching is Good

When Apple released its first auto-updated patch just before Christmas, it was because the company - and the US Department of Homeland Security - recognized the critical nature of time synchronization. The delivery of time services has increasingly become a gating infrastructure concern for the private sector because of the significant security implications. It is now a focus for regulators, especially in the US.

A major issue for debate is whether a global standard will be adopted for time synchronization or if participants will revert to local time sources. Nowhere is this more important than in the financial markets, where the stakes are highest and where the arbitraging of time latency has been widely debated.

FINRA has proposed clocks be synchronized to one micro-second of National Institute of Standards and Technology (NIST) time, the official measure of time in the US. Meanwhile, the SEC has initiated an enquiry into the involvement of high-frequency trading firms in the case in which data from the Federal Reserve appeared to be acted upon before or simultaneous with its embargoed time release.

Nagging Concerns
Arguably the most stringent controls that have existed in the US were Financial Industry Regulatory Authority's Order Audit Trail System (OATS) rule 7430, which requires all of the timing devices of member firms to be within one second of NIST. Time-stamping in the UK is expected by the Financial Conduct Authority (FCA) as part of systems control, but is not specified in terms of accuracy or standard.

One nagging concern is that regulators are over encumbered with the litany of rapid developments in the technology intended to solve this problem. Simplification and standardization will reduce complexity and confusion, which is clearly in the interests of all governments.

In the EU, the market structure does not support the same sort of trading activity that is of concern to the US authorities. MiFID II refers to business clock synchronization in just one article of a 150-article directive, which signifies this is of much lower regulatory interest than in the US. The FCA in the UK has no major concerns with market practice after issuing updates on spoofing, layering and other similar forms of market abuse in 2007/2008. The main concern of EU regulators is to monitor activity at increasing speeds and this is covered by more accurate time records outlined in the new directive.

In line with this need for micro-second reporting has been support from the International Organization of Securities Commissions (IOSCO). The regulatory association is emphasizing the benefits to the regulators that will be delivered by such accuracy, allowing them to monitor properly and be able to historically analyze potential market abuse as markets become more complex and dispersed.

Setting an Example
Regulators need to require exchanges and participants to synchronize their clocks, not just within entities, but across communities to ensure a safer and fairer marketplace. They also need to consider whether there will be any technological specification beyond the actual accuracy required - for example GPS time synchronization is much more open to failure than alternatives that can offer more resilience and avoid jamming/spoofing.

This isn't a subject that can easily be dodged by regulators. As markets increase in speed and frequency, oversight will increasingly depend on micro-second accuracy to properly monitor abuse. This is virgin territory for most regulators, and an ocean away from the images of stock exchanges with hundreds of enforcers poring over end-of-day trading statements.

But the responsibility for a comprehensive, global solution doesn't just lie with government officials. Exchanges need to develop resilient and robust approaches to record-keeping so that any single failure (e.g. GPS) is backed up with a secure alternative.

While trends towards global standardization will help monitoring and enforcement of the financial markets, they also provide the opportunity to set an example for other areas of global commerce. The potential for the financial markets to be seen as doing global good is not one to be passed up, especially given what has happened to the reputation of the industry over the past few years.

Jock Percy is the chief executive officer of Perseus, a managed services provider of global networks, colocation and trading technologies.