January 2018 is the first in a series of deadlines for upcoming regulations that are aimed at making the capital markets a safer, more transparent place. Timestamping, while not the most difficult part of MiFID II to comply with, is vitally important to many other regulatory efforts as it underpins reporting, best execution and market surveillance. It also offers other benefits beyond simply complying with regulations.
Trading has become a highly granular practice with multiple events happening each fraction of a second. Time is now measured in microsecond intervals and so thousands of trades may be executed in the time it used to take to manually execute just one. This reduced, or compressed, time can magnify the effect of otherwise insignificant events. A momentary increase in latency on a network may only have existed for a matter of seconds, but the effect on the several hundred potential trades executed in that time could be catastrophic. Understanding (or even discovering) where this slippage occurred is only possible with highly detailed, granular, and accurate timestamping. Without the ability to retrace an order’s entire chain of events, from order placement to getting filled, it’s impossible to identify or calculate the best possible outcome and improve your execution on future trades.
Good timestamping can also give firms the ability to better test a trading strategy before releasing it into the market. With algorithm testing stipulated under MiFID II, accuracy and granularity of the time stamp is of paramount importance if testing is to be realistic.
In a blog from this time last year, we looked at the different ways a timestamping solution could be implemented – using a single source, multiple synchronised sources or a third party source – the question remains, however, as to how the market is intends to comply.
The age-old decision: to build or to buy?
From talking to the market, we’re seeing firms approach compliance in different ways. For some, firms who already have a timestamping solution (perhaps for equity and futures trading), it’s a relatively simple task of extending this solution to cover all asset classes across all their regional offices.
For others, without a timestamping solution, the question of what solution to implement comes to the fore. The two options are (as is usually the case) to build it yourself or buy it. Self-build, while attractive from a flexibility and competitive point of view, may not be the most sensible option for all the components of such solution. At the basis of any timestamping system is the time signal itself. If this isn’t accurate and approved by the regulator, efforts to comply may end up being wasted.
Once a compliant source has been secured, it’s then a matter of deciding which elements of the solution need to be built in house and which can be found in the market. The level to which a system relies on external, third party solutions varies across the firms we’ve spoken to. At one end of the scale, some are simply buying a PTP signal directly from data centre providers on a location by location basis and then building everything else. At the other end, some firms are only building what they cannot source externally, with an increasing number relying completely on one service provider to manage the timestamping solution across multiple locations. In addition, managed solutions are being enhanced with improved value added services that facilitate monitoring of time signal and comparison across multiple sources.
More than just a tick in the box
Clearly, whichever model is used there are ancillary benefits that a correctly implemented and managed solution can provide. Aside from “simple” compliance tasks, timestamping can help firms better understand and optimise transaction costs, prove best execution, and are even able to play a part in ensuring orderly markets through enhancing any available algo testing.
Getting timestamping right shouldn’t be the most difficult part of MiFID II compliance but spending the time and effort to make sure it’s right could reap rewards beyond just a tick in the box from the regulator.