Previously I’ve shown how regulators and business strategy in the financial markets are more sensitive than ever to small intervals of time and why the inherent inaccuracy of time in the trade-lifecycle makes any temporal references potentially misleading, not to mention marketing’s blatant misuse of time in justifying advantages over competitor offerings.

Atomic Time

Time, for our purposes, is the production of a clock that measures changes of a natural phenomenon or of an artificial machine according to the rules of the time standard it is meant to implement. We’re accustomed to dealing with the Mean Time, or Civil Time standard, which is based on the earth’s rotation around the sun. Because of variability resulting from the elliptical nature of this rotation, leap years are required to adjust for the natural clock-drift that occurs. Specifically we deal with the International Atomic Time (TAI) and Coordinated Universal Time (UTC) standards with UTC simply calculated by adding leap seconds to TAI time.

Atomic Clocks, which rely on atomic resonance of a cesium 133 atom for example, have become the standard for accurate time. In 1967, the 13th General Conference on Weights and Measures defined the International System (SI) unit of time, the second, in terms of atomic time rather than the motion of the Earth. A second was defined as:

The duration of 9,192,631,770 cycles of microwave light absorbed or emitted by the hyperfine transition of cesium-133 atoms in their ground state undisturbed by external fields.

It turns out that TAI time is based on atomic time and calculated by computing a weighted average of time kept by roughly 300 atomic clocks in over 50 national laboratories around the world. Many of these atomic clocks are cesium clocks.

Computer Time

When software running on a single computer requires a precise version of the current time it does so by calling the appropriate operating system function such as gettimeofday on linux or the precise QueryPerformanceCounter and less precise GetTickCounts on windows. The values returned by these functions are based on the system’s local oscillator which updates the clock counter at a frequency known as the tick rate. This tick rate determines the precision (i.e. resolution), of time. Windows, for example, allows users to query the tick rate via the QueryPerformanceFrequency function (Note: requires support from underlying hardware). A tick rate of 1,000,000 updates a second, for example, allows the clock to support microsecond precision. One challenge for hardware engineers is setting a tick rate where the accuracy of the clock can be maintained without overloading the system with the tick events themselves.

There are numerous factors that cause variations in the the frequency of oscillation including age of the hardware components, system load, and temperature. These variations are called jitter and jitter leads to clock drift which results in inaccurate timings.

Clock Synchronization

The Financial Industry Regulatory Authority FINRA (formerly NASD) devised Rule 6953 to address the need for accurate time in their Order Audit Trail System (OATS). The rule imposed clock synchronization requirements by stating:

Rule 6953 requires any FINRA member firm that records order, transaction or related data to synchronize all business clocks used to record the date and time of any market event. Clocks, including computer system clocks and manual timestamp machines, must record time in hours, minutes and seconds with to-the-second granularity and must be synchronized to a source that is synchronized to within three seconds of the National Institute of Standards’ (NIST) atomic clock. Clocks must be synchronized once a day prior to the opening of the market, and remain in synch throughout the day. In addition, firms are to maintain a copy of their clock synchronization procedures on-site. Clocks not used to record the date and time of market events need not be synchronized.

The rule is written so it addresses the requirement for accuracy and precision of time in an inherently distributed system like OATS as well as addressing the inaccuracy that can result from clock synchronization itself. Like the jitter I described in a system’s local oscillator, the propagation delay of the clock synchronization signal can also cause jitter.

Here we hit upon the double-edged inaccuracy of distributed time. First, the local system clock will drift (a.k.a clock drift) compared to the other clocks, necessitating each clock’s synchronization to a shared accurate time source. Second, each clock in the synchronization scheme will experience varying propagation delays (a.k.a clock skew) with this time source, potentially resulting in more inaccuracy between clocks.

A high-quality clock synchronization solution will ensure the accuracy for each node being synchronized by providing a reference source for actual time and disciplining each node’s local clock to be synchronized to this time.

Network Time Protocol

Network Time Protocol is a common clock synchronization protocol standard used on packet switched networks. It currently stands at version 4.

Check back soon as we show how standard implementations of the Network Time Protocol, handle drift and jitter to synchronize the clocks in the machines that power the trade lifecycle.

It is within this process that regulators and trading organizations have become incredibly sensitive to even the smallest measures of time. The trading process can be broken down into the following steps. First is the specification of the order details (eg. price, symbol, size) from the buyer or seller followed by the acknowledgment of that order by a trading venue such as an exchange, ECN, or broker dealer. The order is then optionally routed to one or more venues that will execute the trade by matching it with a counterparty order before reporting the details of the execution back to a trade-reporting facility.

Vendors, regulators, data providers, and marketers of trading technology mislead when quoting microsecond, millisecond or any temporal measures by failing to describe the inherent inaccuracies of such measures in a distributed systems context. Because the trade process described above is fundamentally distributed across machines whose concept of time is largely subjective, a measured interval of one second between any nodes in this trading process may amount to significantly more or less than one second when measured on the scale of an atomic clock.

To ensure that regulatory or strategic measures of time, are in fact accurate, it is necessary to create a single global understanding of time between related machines. Clock synchronization refers to the problems caused by clock skew and jitter, and the solutions that enable a common, more accurate understanding of time, albeit with built in margins of error.

Regulatory Time

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.

OATS Reporting

…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.

Profit Time

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.”

Investment Banks

“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.”

Brokerage House

“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.”

Millisecond Marketing

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.

The widespread industry shifts in the financial markets have created an unprecedented and collective awareness and sensitivity to small intervals of time. The fact is that despite driving both regulatory and strategic policies, the quoted measure of these intervals remains another piece of misinformation and sometimes disinformation that misleads and confuses industry stakeholders.

In this three part series, I’ll first show examples of time’s importance from a financial market regulatory and strategic perspective. Second I’ll show exactly how and why this time is misinterpreted. Finally i’ll talk about how clock synchronization techniques can be used to better rationalize the measure of time across system boundaries.