MiFID II introduces the requirement to synchronise the business clocks of trading venues and their customers, standardising the recorded time on post-trade data, transaction reporting and, most importantly, order event auditing. Regulators argue that in the event of unusual market activity they will be able to pinpoint the exact moment things turned sour. A noble cause then, but is it feasible?

The first problem is that of a clock source. Trading systems will need to synchronise themselves to some ‘golden source’ of time. In the interests of avoiding monopolistic ‘Time Lords’ who have legislative authority to charge lots of money for telling the time, it’s probably best to settle on an existing system like GPS. It’s accurate to tens of nanoseconds, but can we use it?

Specialised Precision Time Protocol (PTP) hardware can synchronise clocks in a network at the nanosecond resolution but these are prohibitively expensive – especially for smaller, independent investors running their own hardware. The software implementations of PTP only achieve accuracy to the order of microseconds – that’s thousands of times less accurate than ESMA’s discussion paper speculates will be required for HFT firms.

Assuming you have spent a lot of money on buying a GPS time source, upgrading your network to use it and modifying software to take advantage of the higher resolution clocks, can you meet the requirements? Possibly. Reading the time through off-the-shelf operating systems takes some nanoseconds, writing an auditable event takes some nanoseconds, sending a signal down copper wire takes some nanoseconds. Along with other unpredictable jitters in the system, all of these will conspire to degrade accuracy beyond the acceptable regulated allowance. Perhaps regulating to a few milliseconds’ accuracy may be more achievable?

Regulation is only as good as its enforceability. Given the inherent instability of time measurements at the speculated resolution, how is anyone ever going to provably measure that it is not correct? Are we all just wasting our time?