Regulators Concerned About High Frequency Trading and Timestamps

July 16, 2014 by Thomas F. Burke, P.C.

The United States securities regulators, the Securities Exchange Commission ("SEC"), and the Financial Industry Regulatory Authority ("FINRA") and the United Kingdom's Financial Conduct Authority ("FCA") are tightening rules to impose stricter time-keeping standards on trading clocks that are used to recreate trading orders. The reason for the concern stems from high-speed trading from computers that transact thousands of trades in a millionth of a second. The acceleration is hindering the regulators ability to recreate trades by matching buyers and sellers.

Regulatory and trader clocks can fall out of synchronization if they measure time in different fractions of a second. The Wall Street Journal quoted FCA chief executive officer Martin Wheatley in an interview stating that "If two clocks are out of sync by even a 10th of a second, it's impossible to do proper surveillance across multiple platforms...you have to make sure the market still has integrity."

Without the ability to definitively reconstruct orders, regulators may not be able to detect trading abuses such as "spoofing", a practice where a trader manipulates prices by "layering", entering orders for a stock to indicate strong demand, which lures other traders into the market at inflated prices, and then selling at a profit and cancelling the remaining unexecuted orders.

With trading progressing at such high speeds, it becomes impossible to track the time and order of trades when the time keeping of a broker or other trader is slightly out of sync with regulators' official tie based on government atomic clocks. A further problem is introduced when different trading venues and firms record data at varying levels of precision. Without such evidence, it becomes impossible for regulators to prove whether high-speed trading is illegal or abusive.

FINRA is considering having all of its members sync their trading clocks to less than a second of the country's official clock, the National Institute of Standards and technology' atomic clock, to reduce the impact of trade drift. Currently, members must submit data within a second and exchanges must submit data at the millisecond level of the atomic clock.

The SEC and the FCA are also reviewing the rules on the accuracy of time clocks and stamps on orders. In July of 2012, the SEC has passed a rule ordering the creation of the Consolidated Audit Trail ("CAT"), a massive regulatory project that would allow it to oversee trading in stocks and options in real time. When built, the CAT will require all clocks to be accurate to a millisecond and clocks to not have drift of more than 50 milliseconds.

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