OFR_2016_Financial-Stability-Report

nearest second. The CFTC similarly requires one-second resolution for its
real-time reporting. The SEC recently narrowed the measurement window
to 50 milliseconds for OTC equities and securities in the National Market
System (NMS) (see CFTC, 2016a; FINRA, 2016a).
Securities markets typically give price-and-time priority to incoming
transaction orders. Under the SEC’s Regulation NMS, for example, transactions
data must be shared with the securities information processors who
supply the National Best Bid or Offer to market data vendors at least as
timely as with HFT machines receiving a direct feed (see SEC, 2005). Yet
under current rules, time stamps on two trades that come in milliseconds
apart could be mismeasured in ways that mask which one should have priority
(see Figure 73).
Technological limitations make
it impossible to recover a true event
time. For example, clock drift is
the tendency of local clocks to
run too slow or fast. Signal jitter
is the unpredictable delay in a
signal moving over long distances.
Random disturbances like drift and
jitter add unpredictable noise to the
measured time stamp. In Figure
73, the true event time, x*, precedes
the true event time, y*, but
the recorded times (measured with
error) might be as large as x + or as
small as y_, respectively. This combination
of timestamps (x + and y_,)
would create the misperception that
y preceded x.
Figure 73. Measurement Uncertainty Confounds Time-Stamping of
High-Frequency Trades
Time
Source: OFR analysis
Conclusion: Data Require Continuing Attention
y +
x – y*
y –
x*
x +
The true trade times, x* and y*,
are unobserved. Time stamps
must either round up or down.
Which trade occurs first?
Risk management and financial stability assessment require data of sufficient
scope, high quality, and proper accessibility. Much progress has been
made to improve data since the crisis. But further improvement requires
attention to the deficiencies that persist. The OFR has also seen that even
though industry participants praise standards, they may not adopt them
without mandates from regulators. The recent progress of the LEI provides
an example (see Crowley, 2016).
Data management is often viewed as a firm-specific risk. However, it y +
also presents possible systemic risks. Increasing complexity and interconnections
present ever-evolving challenges.
x
y*
y – x*
–
Time
x +
The true trade times, x* and y*,
are unobserved. Time stamps
must either round up or down.
Which trade occurs first?
Key Threats to Financial Stability 91