As I mentioned, the measure of small intervals of time, in the financial markets, is deeply rooted in both modern regulatory policies as well as electronic trading strategies. The SEC, FINRA and other industry regulators have innovated their way towards temporal constraints that reflect the lightening speed of today’s electronic trading landscape. On the business side, the continuing arms-race towards low-latency algo trading platforms is built on the premise that profit comes to those who discover and trade the best available price first. With milliseconds and now microseconds separating competing trade requests, industry participants are paying huge premiums for technology that promises even the smallest temporal improvements over competitor offerings.
Here is just a small sampling of the temporal references found in today’s electronic-trading compliance requirements:
FINRA Trade Reporting:
…transactions that are subject to NASD Rules 6130(g) and 6130 (c) and also required pursuant to an NASD trade reporting rule to be reported within 90 seconds.
SEC Regulation NMS Self-Help:
If a market repeatedly does not respond within one second or less, market participants may exercise “self-help” and avoid that market for purposes of the Order Protection Rule.
…Order Sent Timestamp (date and time) is within +/- 3 seconds…
SEC Regulation NMS Intermarket Sweep Order Workflow
Answer: Yes, waiting one full second to route a new ISO to an unchanged price at a trading center would qualify as a reasonable policy and procedure under Rule 611(a)(1) to prevent trade-throughs.
SEC Regulation NMS – Flickering Quote Exemption
In addition, Rule 611 provides exceptions for the quotations of trading centers experiencing, among other things, a material delay in providing a response to incoming orders and for flickering quotations with prices that have been displayed for less than one second.
SEC Regulation NMS – 3 Second Quote Window
To eliminate false trade-throughs, the staff calculated trade-through rates using a 3-second window – a reference price must have been displayed one second before a trade and still have been displayed one second after a trade.
At best these temporal references serve as explicit requirements that drive the necessary software decisions to stay compliant. However, interpreting these time-intervals without considering the distributed nature of the trade-lifecycle and the ambiguity of time in this context, can lead to misinterpretation and confusion.
Similarly, on the business side, there is an unprecedented awareness and profit-sensitivity to small time intervals. Here are some quotes from industry stakeholders:
Chicago Mercantile Exchange
“Traders using CME Globex demand serious speed. If the network is even a few milliseconds slower than 40 milliseconds of response time, they don’t hesitate to notify CME.”
Philadelphia Stock Exchange
“The standard now is sub-one millisecond,” said Philadelphia Stock Exchange CEO Sandy Frucher. “If you get faster than sub-one millisecond you are trading ahead.”
“Firms are turning to electronic trading, in part because a 1-millisecond advantage in trading applications can be worth millions of dollars a year to a major brokerage firm.”
The TABB Group
“For US equity electronic trading brokerage, handling the speed of the market is of critical importance because latency impedes a broker’s ability to provide best execution. In 2008, 16% of all US institutional equity commissions are exposed to latency risk, totaling $2B in revenue. As in the Indy 500, the value of time for a trading desk is decidedly non-linear. TABB Group estimates that if a broker’s electronic trading platform is 5 milliseconds behind the competition, it could lose at least 1% of its flow; that’s $4 million in revenues per millisecond. Up to 10 milliseconds of latency could result in a 10% drop in revenues. From there it gets worse. If a broker is 100 milliseconds slower than the fastest broker, it may as well shut down its FIX engine and become a floor broker.”
“Arbitrage trading is critically dependent on trading off valid prices and getting the orders in as fast as possible without overwhelming the exchange gateway and so latency on the market data stream and order entry gateway capacity is a big issue.”
Chi-X/TransactTools Press Release
“TransactTools’ standard benchmark tests found that over 95 percent of messages sent to Chi-X were responded to in an average of 10 milliseconds…with the fastest response time being four milliseconds. For high volume throughput testing, in which five million messages were generated in total, Chi-X maintained an average roundtrip latency of 18 milliseconds while handling 16,000 messages per second. Chi-X’s internal latency, which is a measure of the system’s ability to process messages in its core rather than the roundtrip measurement, was measured by Instinet Chi-X at 890 microseconds, or less than one millisecond.”
With the industry’s increasing awareness to small time intervals, marketers are playing their temporal cards. Vendors of market data distribution platforms, high-performance messaging solutions, complex event processing and many of the other high-performance technologies on Wall Street can also misinform and sometimes disinform the capabilities of their offerings with respect to time and performance. Suggesting a vendor’s market data distribution technology offers millisecond or microsecond improvements over a competitors offering, without describing the testing context and particularly how clocks were synchronized in reaching the final measure is unethical. As high-performance trading technologies continue to commoditize, the pressure to show even the most minute temporal improvements will only increase.
Next I’ll describe the lifecycle of a trade request, and why measures of time in this context are inherently innacurate.