Clock synchronization has a direct impact on trade reconstruction, market abuse monitoring, surveillance and best execution by providing a link between prevailing market conditions and the time of order receipt and execution. The US Financial Industry Regulatory Authority’s (FINRA) requires brokers to time stamp the events surrounding an order’s progression from the initial receipt to its eventual execution (cancellation). Brokers report these time stamped events to FINRA in the Order Audit Trail System (OATS) so that they can be easily tracked for auditing purposes. In order to accurately time stamp prescribed events, FINRA Rule 7430 requires that brokers synchronize their business clocks to the National Institute of Standards and Technology (NIST) atomic clock. In the EU, the European Commission (EC) is more prescriptive. MiFID II’s Article 50 as well as RTS 6 and 7 prescribe the events that need to be time stamped (for all investment firms) but RTS 25 sets the maximum divergence from Coordinated Universal Time (UTC) to a 100 microseconds or better for activities that “use a high frequency algorithmic trading technique.” The EC defines the “high frequency algorithmic trading technique” based on a message per second threshold that is extremely low so that practically every computer-based (algorithmic) trading decision event needs to be captured to the microsecond. The EC allows computers to “drift” from the official time by a 100 microseconds (See RTS 25, Annex Table 2).
What’s the difference between NIST and UTC?
NIST and UTC are essentially the same time. NIST is the US “local version” of UTC time standard and because they synch to each other, NIST is typically referred to as UTC(NIST). Michael Lombardi, head of the remote time and frequency calibration program at NIST explains : “During the year, UTC(NIST) never varied from UTC by more than 20 nanoseconds (0.000 000 020 s). Thus, while there is technically a difference between UTC(NIST) and UTC, the difference is miniscule and for all practical purposes can be ignored.” It is possible that FINRA recognized that UTC and NIST were essentially the same time in their frequently asked questions (FAQ) guidance where they allow firms to synchronize to a time standard that is within a one-second tolerance of NIST.
Many clients, especially head traders and compliance officers in the US and Europe, have asked us:
How is clock synch practically implemented?
Bloomberg uses Global Positioning System (GPS) satellites to source UTC time.
Global positioning satellites each have multiple atomic clocks that are coordinated to send transmit the “official” time. At each Bloomberg data center, there are multiple GPS time receivers with high quality hardware clocks synchronized against a constellation of GPS satellites. GPS receivers transmit the time into multiple “network time protocol” (NTP) servers. These servers set the official “datacenter network time.”
How does the time get to the applications where the time stamps occur?
Platforms such as Bloomberg’s Order Management Systems, fixed income trading applications, order routing etc. are “hosted” on computers in the data center. The operating systems of those computers ask the NTP servers “what time is it?” every 64 seconds in order to maintain synchronization to within the drift tolerance.
An independent feedback loop monitors whether the time is referenced correctly. A “cron” job monitors the offset between the NTP server time and time on the computer that hosts the applications. If the difference between the two time stamps drifts past a millisecond for EU-regulated applications or 50 milliseconds for US-FINRA regulated applications, a message is sent to the network operation center “whining” that time has “drifted” past the acceptable threshold asking someone in the network operations center to intervene.
More and more regulators are setting rules mandating a common time reference for event time stamping in order to be able to reconstruct events to monitor for market abuse and understand market disruption. Synching data centers using GPS satellites is how Bloomberg helps clients comply with these regulations.