Financial markets are currently governed by strict rules; one of these being the requirement to record when a deal has been brokered. Typically, the finance industry has logged this by day, date and time.
However, new rules to be introduced in 2018 will mean much more stringent parameters are put in place. The US Securities and Exchange Commission will implement Rule 613 stipulating all machine-to-machine trading transactions must be recorded with an accuracy of one microsecond. Similarly, the European Securities Market Authority (ESMA) will introduce Regularity Technical Standard Number 36 on MiFID II, meaning all high-frequency trading deals need to be timestamped within one microsecond.
So, how will these new rules affect trading as we know it and will companies need to make wholesale changes to their operation? In short, yes – but it need not be as daunting a task as it may appear on the surface.
The current time recording infrastructure largely uses Network Time Protocol (NTP), which is not based around a hardware timestamp but an NTP server that provides the time of day and the time tick. In order for this method to work, each client and data server must have an NTP network interface card (NIC).
But, under new specifications, in order to deliver the high degree of accuracy required, a move from NTP to Precision Time Protocol (PTP) will be needed.
Adding a grandmaster clock to the network will help achieve this and does not have to be an exhausting process. As each unit can support a large number of clients, the number of components introduced to the network can be kept to a minimum.
The real cause for concern to the industry will come in upgrading hardware to be compatible with PTP. One possible solution would be to replace all existing NTP NICs with new ones that will work alongside the new PTP technology. This will represent a large investment and may be prohibitive to many companies.
Therefore, there is a demand for a low-cost PTP client that can be easily integrated into existing networks. A more cost-effective solution would be to have the client on a small form-factor pluggable (SFP) inserted into a spare SFP port of the NTP NIC in a client server. Ultimately, this negates the need to replace NTP NIC hardware and significantly reduces costs; posing a much more palatable solution for businesses.
When this legislation takes hold in less than a year’s time, it is certain to have wide-reaching effects on financial markets.
Currently, there is no local regulation regarding timestamping in Asian markets, primarily because there are two types of enterprise in Asia; global organizations and local banks. The former, such as Morgan Stanley, Barclays, Deutsche Bank and more, trade in international markets. For example, a deal may be brokered between Beijing and London. Because the deal involves a European city, the new timestamping regulations will apply. This is expected to bring about the first wave of sync technology being applied in countries such as India, Japan and China, in order for them to comply with their trading partners.
The second wave will arrive later when local institutions, such as banks that are not as active in North America or Europe, catch up with the rest of the market.
It is clear that new regulation will make the financial markets much more accurate in their recording of deals and will have an impact not just on the markets that it directly refers to but those that trade with European and North American markets too. Whilst companies working in this sector must make a change in order to comply, it need not be the expensive wholesale changes that might appear necessary on first impressions.