In the financial industry, computers can execute transactions automatically, buying and selling based on software algorithms. This has massively increased the number of competing exchanges and the frequency of financial trading. High-frequency trading (HFT) now accounts for roughly 70 percent of all stock trading volume. This has led regulators to ensure accurate timing is distributed across computer systems that need accurate timestamping for record keeping and to establish a traceable sequence of events for use during any subsequent audit trails.

The world financial market is highly dependent on servers and mainframe computers. These computer systems usually operate in a distributed manner. The rapid expansion of computer-based trading and its highly complex algorithms has increased the need for trading systems to be synchronized and traceable to a common reference time. Trading platforms and associated IT hardware must be able to record timestamps accurately to prevent violations and fraud. To achieve a fair, safe and efficient market operation, as well as to ensure more transparent transactions and better protection of investors' rights and interests, different countries and regions have imposed regulations and requirements for the use of business clock and time synchronization.

US regulations impacting synchronization accuracy requirements

To comply with regulations from the Securities Exchange Commission (SEC), the National Association of Securities Dealers (NASD) issued a series of rules in March 1998. These included the Order Audit Trail System (OATS) Rule 6953, which required each NASD member with access to a regulated financial market to synchronize its business clocks to a designated reference time source so it could accurately record the date and time of any event.

In 2008, the Financial Industry Regulatory Authority (FINRA) issued new requirements for stock market time synchronization. FINRA OATS Rule 7430 specified National Institution of Standards and Technology (NIST) Coordinated Universal Time (UTC) as the official reference for US stock market trading. It required accuracy to within 1 second of NIST UTC. In late 2014, FINRA issued Regulatory Notice 14-47, which recommended a reduction in the synchronization tolerance of computer clocks to within 50 milliseconds of NIST’s atomic clock. This proposal took effect in April 2016 as FINRA Rule 4590.

The SEC subsequently issued Regulatory Notice 16-23 in July 2016, approving a new clock synchronization standard of 50 milliseconds applicable to computer clocks used to record certain events in National Market System (NMS) securities or over-the-counter (OTC) equity securities. Firms were given a specific time frame to implement the clocks and comply with the new 50 millisecond requirement – six months for system clocks that could capture time in milliseconds or 18 months for system clocks that could not capture time in milliseconds.

Issued in 2012, SEC Rule 613 required FINRA and US stock exchanges to establish a consolidated audit trail (CAT) that would allow regulators to better monitor and analyze trading activity. CAT requires timestamps with millisecond resolution in five parts of the audit trail:

1. The time the order was initiated
2. The time the order was sent
3. The time the order was received
4. The time the order was modified or cancelled
5. The time the order was executed

In February 2020, FINRA published CAT Alert 2020-02, specifying the standards for self-reporting deviations of clock synchronization standards to FINRA CAT. CAT participants have a tolerance of 100 milliseconds to NIST while members remain at the 50 millisecond tolerance as specified in Rules 4590/6820. In addition, CAT participants must self-report violations that exceed a tolerance of one second while members must self-report violations that exceed 100 milliseconds. Furthermore, clock granularity should be recorded and reported in milliseconds and possibly finer increments as required by NMS.

European regulations impacting synchronization accuracy requirements

In 2007, European Union (EU) member states began to implement the Markets in Financial Instruments Directive (MiFID), the cornerstone of the regulation of the entire EU financial market. MiFID empowered the European Securities and Markets Authority (ESMA) to draft regulatory technical standards for European financial markets and firms. MiFID was widely perceived within the financial industry as an incomplete project that needed major revisions. The European Parliament approved MiFID II and its accompanying regulation in April 2014 and put them into effect in January 2018.

The time synchronization requirements in MiFID II are more stringent than those currently enforced in the US. The regulations include requirements for clock synchronization and the maintenance of related audit trail information. Article 50 of MiFID II calls for trading venues and their members and participants to comply with accuracy requirements regarding the maximum divergence of their business clocks from UTC and to timestamp reportable events to a specific granularity. The Regulatory Technical Standards 25 (RTS-25) section of MiFID II specifies four basic synchronization requirements:

1. UTC reference time: The business clocks that provide timestamps for any reportable events must be synchronized to UTC using a terrestrial link or satellite system.
2. Accuracy for operators of trading venues: Operators of financial trading venues must keep their clocks within the maximum allowable divergence from UTC as determined by the gateway-to-gateway latency of their trading systems. Table 1 summarizes these accuracy requirements.
3. Accuracy for members or participants of a trading venue: The business clocks of members or participants of a trading venue must adhere to specific divergence limits for different types of trading activities. Table 2 summarizes these requirements.
4. Compliance: Operators of trading venues and their members or participants must establish a system of traceability to UTC and demonstrate it by documenting the system design, functions and specifications. This includes being able to identify the exact point at which a timestamp is applied and demonstrate that the point within the system where the timestamp is applied remains consistent. The traceability system should be reviewed at least once per year to ensure compliance with the regulations.

Table 1: Accuracy for operators of trading venues

Table 2: Accuracy for members or participants of a trading venues

How PTP improves time synchronization accuracy and reliability in financial trading

Most time systems in the financial industry are still based on the Network Time Protocol (NTP) method. Time synchronization is performed within the exchange, data center and member units through LAN connections. The reference clock is usually sourced from a global navigation satellite system (GNSS) signal together with a rubidium atomic clock. Figure 1 shows the network clock timing architecture.

Figure 1: Time distribution network in the financial industry

The limitations of time distribution by NTP are becoming increasingly obvious. The NTP protocol packets are affected by the working status of the data network. Network latency, latency variations and asymmetric delays can all change in unpredictable ways. This unpredictability makes it impossible to improve the accuracy of the time synchronization at the client when using the NTP method. As a result, the goal of NTP systems is to achieve accuracy within a few milliseconds.

With continuous evolution of trading algorithms and improvements in hardware processing power, the volume of financial transactions continues to rise sharply. This is driving the need sub-millisecond time synchronization accuracy, as in the case of HFT, so that financial transactions can be recorded at a rate that meets the demands of an audit trail. With the development of the IEEE 1588 Precision Time Protocol (PTP) based time synchronization system, the NTP server is gradually being replaced by the PTP grandmaster (GM), or PTP/NTP dual-protocol GM. Trading venues, investment firms and other financial market participants can gradually introduce PTP-based clients, or migrate NTP clients to PTP clients, to provide higher time synchronization accuracy with the help of software- and hardware-assisted timestamping capabilities, as noted in Table 3.

Table 3: Accuracy of different time synchronization methods

The reliability of the synchronization source is also a critical requirement within the financial industry. “Multisource” is a recurring term together with GM/time server. Because of the potential for path failure, it’s important to ensure that clients have multiple alternatives to get their time. This can mean using multiple network paths, protocols or timing technologies.

Because of the rapid development of the financial market, there are now many small financial firms and market participants. Some small firms do not have sufficient IT staff to ensure that their time synchronization accuracy meets regulatory requirements. In these cases, firms can look to telecom operators that offer Synchronization as a Service (SyncaaS).

A SyncaaS offer can use the wide coverage of the telecom operator’s synchronization network to distribute a UTC-tracked time signal to a given financial firm. Telecom operators can provide superior PTP security and redundancy capabilities, along with monitoring to ensure that time accuracy meets service-level agreements and financial regulatory requirements. The time signal distributed by the telecom network can be used as the primary signal for the GM/time server of trading venues, or as a redundant reference for failover.

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