The timestamping requirements of MiFID II have been discussed at length in the press and behind closed doors. New versions of platforms are being released which cater for these requirements and it seems that the enormity of the compliance task is well understood. What has been left out by many is the most important part and one which, arguably, is the most difficult. The ability to stamp trade data at millisecond intervals is possible, and it will help in increasing transparency, but whatever solution is adopted to achieve this, it needs to take into consideration technical and commercial considerations for all participants. Further, this accurate time must remain accurate across multiple geographies and, potentially, across the whole trade lifecycle.
There are two options when it comes to setting up an accurate time signal across the business. Firstly, get a single, accurate time signal and propagate this across the business or secondly, install accurate time signals at individual locations and synchronise them using satellite systems. Using a single source may well sound easier, but propagating across locations in an efficient manner is not a trivial task.
Synchronisation might be a sensible option when different parts of the business need accurate signals at discrete locations and might need different levels of accuracy; oscillators situated in different locations and synchronised via GPS seem to fulfil the criteria set out by ESMA. Having said that, there is concern in some quarters that GPS may not provide traceability back to UTC.
What’s right for your business?
Both solutions have merits and each is suitable for different businesses but the key to getting compliance right is to understand what the individual business needs and achieve this efficiently. Where during the trade lifecycle do you need timestamping? Just at the execution point? Or across different activities? What activities will it have to cover? MiFID stipulates different levels of accuracy for different trading activity:
- Operators of trading venues have to use timestamps accurate to 100 microseconds if their gateway-to-gateway speed is under 1 millisecond and can relax timestamp accuracy to 1 millisecond if gateway-to-gateway is longer than that.
- HFT market participants have to meet the 100-microsecond standard.
- Algorithmic, but not HFT, participants have to be at 1 millisecond.
- Human-powered trading needs a clock that is accurate to 1 second.
All these factors will have to be taken into account when deciding which method to use. Clearly spend is needed to comply but knowing where to direct that spend is critical. In April 2014, the European Commission estimated that overall, MiFID II will impose one-off compliance costs of between €512 and €732 million plus ongoing costs of between €312 and €586 million per year. With such high levels of expenditure, it is an obvious point that this investment must work correctly.
Is there a simpler way?
There is, however, a third option. There is an opportunity for an independent market participant with reach and scale to offer a standard “time-as-a-service” at discrete locations and it could be provided as part of other trade-related services (data, or connectivity, for example). If this provider could take on the burden and cost of setting up a system which is capable of delivering accurate time across desired locations, many of these problems would be solved.
Institutions cannot wait for this to happen, they must decide which method best suits their business and press ahead with implementation. Although it has moved into the distance slightly, the deadline for compliance is looming and the repercussions of failure are serious.