Endace Proposes One Nanosecond Time Stamp Increments for MiFID II

 Low latency infrastructure specialist Endace Technology has submitted feedback to the European Commission’s MiFID review, recommending mandatory one nanosecond time stamp increments in pre and post-trade data feeds, clock synchronisation to GPS time signals and a consolidated tape that incorporates these timing recommendations. The New Zealand based company also suggests the Commission should consider the need for consistent standards in the area of cyber security, especially for major execution venues.

Endace CEO Mike Riley’s response to the Commission’s review crept under the wire to meet the 2 February deadline for comments and is built on the company’s experience in developing network traffic capture and analysis solutions with a focus on high speed and ultra high speed networks, such as those used by high frequency traders, investment banks and exchanges.

In terms of proposed MiFID II pre and post-trade transparency, Endace says two areas of transparency are not being addressed across both equity and non-equity markets. These are time stamp resolution and clock synchronisation, and quality of execution.

Endace describes the problem that arises from a lack of time stamp resolution and clock synchronisation, stating: “In a fragmented market with multiple execution venues, the manipulation of markets through sophisticated timing arbitrage strategies or deliberate choking of the order input systems of venues or communication networks is a real possibility. To undertake forensic analysis of any suspicious activity requires absolute knowledge of the time at which a trade has taken place.”

Noting the emergence of high frequency trading and the variance in time stamp increments in market data feeds from a range of execution venues – for example, Chi-X Europe time stamps trades in increments of 1 microsecond, BATS time stamps in increments of 1 millisecond and Nasdaq OMX time stamps in increments of 1 nanosecond – Endace recommends that the Commission should require all exchanges, multilateral trading facilities (MTFs) and organised trading facilities to introduce time stamps in pre and post-trade data feeds that support one nanosecond increments. This is a task that the company suggests could be phased in over a period of time, perhaps 12 months.

Clock synchronisation, explains Endace, would allow the investigation of a high frequency trading environment to understand the order in which trades happened. To achieve this, the clocks used as the basis of trade time stamps need to be synchronised to a common time source. The solution suggested here is GPS timing signals.

Endace acknowledges that the installation of GPS receivers that have an accuracy better than 0.1 microseconds will cost a few thousand dollars per installation, but states: “GPS is currently the only technology that allows accurate time keeping across multiple geographic locations with the auditable precision required.”

As well as requiring exchanges, MTFs and organised trading facilities to synchronise with the GPS clock, Endace suggests the Commission should require any of these venues that offer co-location services to make GPS timing signals available to users of the venues at a “reasonable cost”.

Turning to quality of service, the company proposes an end to the lack of and inconsistency of information on the quality of service provided by venues through a Commission mandate requiring all exchanges, MTFs and organised trading facilities to provide prospects and customers with, at a minimum, real-time information on a minimum set of quality figures including fill ratios, quote to tick trade latency and order to completion trade latency figures. These figures should be quoted against an agreed consistent definition and provided on a near real time basis rather than as daily averages that Endace says: “can mask a multitude of issues”.

Adding to the debate on a consolidated tape for European post-trade data, Endace agrees with the Commission view that a tape should apply only to post-trade data, but notes there will always be significant delays in the publication of data via a consolidated tape because of the time taken to get data from a venue to the consolidation centre. This, says Endace, will open up the opportunity for timing arbitrage for high frequency traders that are aware that counterparties are using ‘delayed’ market data.

Endace also reinforces the mandatory need for all market participants contributing data to a consolidated tape to meet its time stamp increment proposal of one nanosecond and clock synchronisation using GPS.

Finally, the company expresses surprise that the Commission has not addressed the need for consistent standards of cyber security within the trading environment. It concludes: “With many market participants located in generic third party data centres with execution venues, there are clearly opportunities to infiltrate the trading eco system in many different ways. Is it time for the Commission to investigate and impose consistent standards in terms of intrusion prevention, intrusion detection, data traffic recording and overall system stability to withstand a coordinated cyber attack on the overall European financial markets?”