FX timestamping progress ticks on, slowly

New fintechs may help with the problem, but lack of urgency holding back pace of change

Syncronise clocks

Foreign exchange market participants are making slow progress on standardising the timestamps they use to conduct transaction cost analysis (TCA) across the market, though progress has been hampered by a lack of urgency around tackling the issue.

“It’s definitely an important issue for the FX market, but it’s not been deemed a ‘critical for business as usual’ type of important,” says Priyank Bhushan, product manager of FX, cash and listed derivatives at the order- and execution-management systems provider, Charles River Development.

“Covid changed the whole paradigm of the FX industry, as all resources were dedicated to ensuring business as usual while everyone worked from home. Today, everyone would like to solve this issue as quickly as possible, but it remains a bit of a resourcing issue,” he adds.

Timestamps are vital for FX market participants to know when an order is received, executed, or rejected, so they can conduct TCA to benchmark their execution quality. The more granular the timestamp data, the better the TCA – and the better to meet regulatory requirements around best execution.

The second Markets in Financial Instruments Directive (Mifid II) requires timestamping accuracy to be within one millisecond for standard electronic trades, within 100 microseconds for high-frequency trades, and within one second for voice trades done over the phone or through an online chat box. Fines for insufficiently granular timestamps can reach up to €5 million, or 10% of global turnover.

However, some order management systems (OMS) within the FX market today are known to round timestamps up to the nearest second, undermining such demands. As such, market participants are unsure whether the FX timestamps they receive are precise, making it hard for them to determine that they’re getting best execution when trading with their liquidity providers (LPs).

While it’s fairly easy to ensure a new OMS trades with sufficient timestamp granularity – as market participants can build such a capability into their OMS from scratch – it’s legacy OMS systems that are hard to solve. Upgrading an old OMS so that it can timestamp in microseconds requires an expensive replacement of hardware and software, which can also cause risk and disruption to the overall system.

Timestamps become even more of an issue if a participant’s OMS clocks aren’t synchronised to that of their trading venue – preventing the corresponding timestamps from being meaningfully compared and thereby further hindering cost analysis. It’s not uncommon for clocks to naturally experience so-called clock drift over time though, and so even if a firm’s internal OMS system can micro- or nanosecond-timestamp, its internal clock could be out of sync to its venue’s – again undermining accurate TCA.

Everyone would like to solve this issue as quickly as possible, but it remains a bit of a resourcing issue
Priyank Bhushan, Charles River Development

Such issues have never truly been at the forefront of FX industry concerns, though. Indeed, no guidance or principles relating to the importance of timestamp granularity or clock synchronisation is contained within the Global FX Code of Conduct, with Mifid II rules also not applying to FX spot transactions – despite the fact they make up an estimated 30% of all FX market turnover, according to the most recent figures from the Bank for International Settlements. As such, aside from budget and resource allocation concerns, another reason for a lack of progress on solving timestamping and clock-drift issues is due to the fact that such efforts are viewed as somewhat voluntary from the perspective of FX market participants.

“Greater regulation will definitely drive quicker improvements here. If LPs are mandated to provide more granular detail of trade execution to clients, then that will really move the market as a whole towards more precise timestamping and synchronised clocks as a result,” says CRD’s Bhushan.

“Without stricter regulation, it also becomes difficult to allocate resources to drive such changes,” he adds.

Mickaël Rouillère, chief product officer at Quod Financial suggests the problem predominantly stems from LPs’ general lack of transparency and unwillingness to fully disclose their execution times. The more granular an LP’s timestamping capabilities, and more accurate its clocks, the better liquidity consumers can compare that LP to others in the market – a TCA comparison that may not be favourable for the LP in question.

“In the FX market, it seems that not all LPs want full transparency around timestamping and identifying when a trade is actually executed, as they aren’t keen on being properly compared to one another. Some of the fuzziness regarding timestamping and clock sync within the FX market is definitely by LPs’ design – and in the equity market it took regulation before it was truly possible to compare LPs to one another,” says Rouillère.

New solutions

In the meantime, some new fintech firms are stepping up with solutions to help out market participants. One is Clockwork – formerly known as Tick Tock Networks, before the social media platform gave the name a new meaning – which provides a way for market participants to synchronise their own internal clocks across different timezones.

It works by getting clients to install Clockwork’s software agents into their physical servers or virtual machines. One of the client’s clocks is then designated as the reference clock, or is connected to a reference clock. The company’s algorithm calculates the offset of each clock from the reference and either provides that offset, or tells the clocks to tick faster or slower to converge to the reference clock.

“For example, it could be the case that one of our client’s clock is ticking -51.2 milliseconds compared to their reference clock, so our algorithm will simply tell that clock to tick faster in order to converge to the reference clock,” says Balaji Prabhakar, co-founder and chief executive officer of Clockwork.

“Meanwhile, another of the client’s clocks could be ticking at +28.2 milliseconds compared to the reference clock, and again our algorithm will kick in and tell that clock to tick slower so that it ticks in sync with the reference clock,” he adds.

While originally designed to help tech companies such as Google and Meta to have precise clocks across their various geographic locations, Clockwork quickly realised its solution could be applied to the financial world. Its clients include Nasdaq, Royal Bank of Canada and Wells Fargo – predominantly within the equities market.

In FX, if a client aligned their clocks in their New York and Singapore hubs, they could for instance measure the precise time that a piece of market data travels between the two points to monitor the health of those long-distance links.

While Clockwork hasn’t been able to on-board any clients from the FX market just yet, Prabhakar stresses that the firm is currently liaising with a number of potential clients.

“We’re speaking to a number of FX trading firms about how our solution can work for them. Cryptocurrency exchanges and trading firms are the next wave of customers for us; in fact, we’ve got a few of them as our clients already,” says Prabhakar.

Fear of a black box

However, not all FX market participants are convinced that new solutions such as Clockwork’s are going to solve the industry’s wider problems. First, there’s always general wariness from banks about opening up systems to new technology.

“When you talk to banks and funds within the regulated financial services about deploying new third-party snippets of code into their system, they’re typically up in arms as to whether that’s an appropriate thing to do from a risk management perspective,” says a source at one FX trading technology provider.

The source also suggests that if the market wanted to align their clocks to allow for precise TCA, everyone would have to agree to use the same solution. The problem wouldn’t be solved if some people used Clockwork while others used a rival clock sync solution, as none of the market’s timestamps would be fully comparable with each other. Thus, nothing would really improve from the situation that FX market participants already find themselves in today.

“It’s not just a case of you being able to solve this issue on your own, everyone has to solve this issue for it to truly be fixed,” he says.

“For some types of data, it doesn’t matter what your outside reference is as long as the stack of data that you’re looking at is synchronised, but with FX trading, you have to link your systems to various exchanges and many other systems around the world, and it’s not so obvious what the right optimisation is or what the best algorithm is,” he adds.

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