The importance of accurate timestamps in financial services
Author: Richard Hoptroff, CTO and Founder, Hoptroff
When the time and date of a particular event has been recorded either digitally or manually, we would say that the event has been timestamped. From exchanges to high-frequency trading, time stamping in the financial services is everywhere, and is used to validate actions from a particular event.
Time stamping allows banks, investment firms and fintech compnaies to keep track of events that take place at a particular moment. Knowing what happened at an exact point gives the user of the information control, and more definitive direction on how to tackle situations of the event that happened in that specific time-period.
For example, an organisation digitally signs an agreement with another party. Later down the line, the agreement is broken. This could be caused by a number of reasons, one of these being slippage in the price of the deal before the agreement was completed. The party in question are claiming they had the right to the action that broke the agreement as it happened before the deal was completed. The digital ledger from the contract could tell you exactly when the contract was signed and whether the action happened before or after this moment. This accuracy is extremely useful in any settlement and the more precise the timestamp can be, the less confusion and ambiguity is caused.
Time stamping in financial services
In financial services, high-frequency traders and brokers require microsecond speeds that are consistent throughout their automated trading platforms. Therefore, having a resilient, traceable, and most importantly, accurate clock synchronisation is becoming more important as we move towards cloud-based networks.
In banking and financial services, inaccurate time stamping can result in cancelled transactions, which can be costly to finance firms across the world. To mitigate this risk, Markets in Financial Instruments Directive II (MiFID II) in Europe and the Consolidated Audit Trail (CAT) in the USA are used for regulatory reporting. Have sought to ensure server clocks synchronisation is accurate to within 100 microseconds of UTC, respectively.
In automated trading platforms billions of trades are processed every year. This means a vast amount of data hitting the exchange every second. Furthermore, thousands of commands are being processed at the same time, whether that is to cancel, buy or sell.
Regulation of these distributed ledgers help with disputes against other trading platforms. Complying with these regulations, avoids any unnecessary bad reputation and with clients. It is likely the most common problem for firms is having traceable time and monitoring for such high frequency. Not being able to trace the events to their exact moment of execution could easily affect their reputation.
While these regulations have brought consistency and order to financial services transactions, it has also put the responsibility on firms to find and implement a compliant solution. Particularly for smaller banks and hedge funds, it can be expensive and labour intensive to roll out a timing solution. Ideally, time stamping should be a cheap, secure, and verifiable public resource that is in alignment with current MiFID II regulations and CAT reporting.
The importance of distributed ledger technology
One development of time stamping is the digital ledger. This distributed ledger technology (DLT) uses a piece of information from the last event, known as a ‘hash’, to chronologically organise exactly how events happened without being tampered or changed by external parties. These timestamps could avoid current trading platforms being left vulnerable through delays. Slippage would cause the event being stamped to appear out of sequence, providing a misleading causal trail of events. Ultimately, data cannot be used to justify a particular event, for example, high frequency trading can be extremely difficult, if not impossible, without accurate timestamps and DLT. By providing an accurate DLT, users can verify the timing of an event and create an authoritative and traceable timestamp.
Time stamping will also enable authorities to prove their records are correct. By using a timing solution that is traceable back to a Stratum Zero source of UTC, each event can be audited and validated. This clock synchronisation technology therefore has the potential to help resolve disputes, even in a court of law, by proving the exact timing of an automated trading deal.
The precision and accuracy of time stamping has never been so important. In financial services, where tiny fractions of a second matter, MiFID II regulations and CAT reporting has been implemented to ensure transactions run smoothly and without confusion. This helps both high frequency traders and investment banks in clearing up exact timings so that the transfer of the correct sum is delivered to the right place at the right time.
The need for resilient, traceable timing solutions
There are many legacy hardware solutions that global banks are still using to this day. Despite their accuracy, these cumbersome solutions are hugely expensive to build and maintain, not to mention the hassle and time it takes to build a new timing infrastructure at every data centre. In this digital era, network-based solutions are reliable and easy to scale, with data stored in the cloud rather than in-house data centres. In addition to this, network-based solutions are only a fraction of the price of hardware, and do not require additional overhead costs. By switching to network-based solutions, banks, hedge funds and financial institutions free up time and resources to use efficiently elsewhere.
Another vital consideration when choosing a timing solution is resilience. When space weather, jamming and spoofing, and satellite outages are on the rise it is increasingly risky to rely, as most solutions do, solely on one satellite time source. Modern solutions have integrated multiple satellites and terrestrial feeds to guarantee secure, consistent, and highly accurate clock synchronisation solutions.
A time stamping that is accurate, resilient, easy to install is necessary for the future of financial services. End-to-end solutions for your time synchronisation require lots of time and effort to build and maintain. Using network-derived Hoptroff Traceable Time as a Service (TTaaS®) solutions would deliver precise, reliable, and digitally coded time which can help keep up with the pace of trading, as well as modern day technology.
In most financial systems, the central hub determines the moment an event officially arrives, and as terrestrial technology matures, demand for cheaper, reliable, and traceable alternatives will increase. Moving towards cloud-based technology has become the norm for most infrastructure, and timing solutions are to follow suit. Financial services must evolve their timing structure to keep up with a world that is increasingly reliant on digital solutions, as well as having the ability to compete with fintech companies that are already innovating.
This article was originally published in Global Finance and Data Review on 27 July 2021.
Ready to learn more?
When thousands of transactions take place every second this level of accuracy and reliability is required to give financial services, banks, hedge funds and fintech companies confidence that their transactions are being properly handled. A highly accurate timing solution like the one outlined above is ready to be rolled out without the purchase and installation of additional timing infrastructure.
Hoptroff Traceable Time as a Service (TTaaS®) is a range of network and software-based timing solutions that are simple, resilient, and cost-effective.
Whether you need the security of verifiable time for compliance, or sub-microsecond delivery into your data centre, our obsession with accuracy will transform your business.
