Importance of accurate and traceable time in financial trading and review of time synchronization in Indian capital markets

Transcription

1 Importance of accurate and traceable time in financial trading and review of time synchronization in Indian capital markets Poonam Arora 1 Vattikonda Bharath 1, Ashish Agarwal 1, Vijay Narain Ojha 1, Amitava Sen Gupta 2 and Dinesh Kumar Aswal 1 1 National Physical Laboratory of India (NPLI), New Delhi, India 2 The North Cap University, Gurugram, India TCTF Workshop, November 23, 2018 during arorap@nplindia.org 1

2 Outline Introduction Importance of Time Synchronization in Financial Sector Review of Financial Trading International Clock Synchronization Regulations Indian Capital Markets Time Stamping in Indian Financial Institutions Existing Regulations for Financial Sector in India Need for New Time Synchronization Solutions and Regulations 2

3 Introduction Globally connected world over the internet has given a boom to digital economy. With most business transactions happening online, a lot of sensitive information flows through systems, networks and geographic time zones. Preservation of sensitive information from malicious attacks has led to the demand for synchronized networks! Timing issues: Time-stamping of events Start and end of events Correlation across networks Audit and cyber forensics arorap@nplindia.org 3

4 Importance of time synchronization in financial sector Its all about tracking transactions and events and any time error can cause significant problems. In absence of proper time synchronization across global networks, the incidents of cybercrime are on steep rise. The 2010 'flash crash' Heist of 81m$ conducted due to non-synchronization of banking system In just 20 minutes the New York Stock Exchange had witnessed it s biggest stock plunge in decades, all traced to data being in a million different places, with different time stamps In Indian Context reported by Press Trust of India One cybercrime in India every 10 minutes, more than 50,000 cases registered by CERT-In in 2017: Times of India India's digital war: Surge in cyber crime rate highlights need for deeper scrutiny: Firstpost.com In India, digital payments segment is slated to reach $1 trillion by 2023 as per a Credit Suisse arorap@nplindia.org 4 report: Economic Times

5 Importance of Time stamping in Trading At 11:25: AM Order for 100 Shares 2075 $ Each share of X company Buy : $ Sell : $ Buy : $ Sell : $ Confirmed at $ 2386 $ 15% increase Confirmed at $ At 11:25: AM Order for 1,00,000 Shares Investment Bank arorap@nplindia.org 5

6 How does Trading Takes place in Stock Exchange Bid & Ask Price: Bid is the maximum price that a buyer offers to buy a share Ask is the minimum price that a seller is ready to sell his shares Time-Price priority The first order which comes with the lowest selling price will be matched with the first purchase order in that batch auction Market order An order placed by a trader to buy/sell the securities at the current available price Limit order An order placed to buy/sell shares at specified price in specific time period mentioned by the trader arorap@nplindia.org 6

7 Automated trading Algorithmic trading/ HFT Trading Thousands of trade orders are performed in a fraction of seconds by a prewritten algorithms which are developed based on technologies like Artificial intelligence, deep learning and machine learning. Taking advantage on very small time scales from milli seconds to nano-seconds A Race for 1. Price information of a share as quickly as possible 2. Updated news in the media which will effect the price of a share Stability of market data The volume of the trade done by HFT is more than 60% whereas the HFT traders are less than 10% of the total traders. arorap@nplindia.org 7

8 Co- Location trading The stock exchanges have provided facility to setup high speed trading infrastructure of the brokers/members very close to their data center to have an advantage of fraction of milli seconds at a huge price NSE charges INR12 lakhs p. a. per full rack space and INR 6 lakhs p.a. per half rack space to setup a colocation facility by any broker or institutional investor. To get the tick by tick (TBT) data of each and every order in the stock exchange NSE charges INR 1 lakh per connection p.a. All the colocation traders will be provided with same length of cable connecting the stock exchange servers and their trading machines to ensure equal time latency, as longer length cables cause more time delay than a shorter cable 1 million = 10 Lakhs arorap@nplindia.org 8

9 Business clock synchronization in United States of America Change in the regulation (i.e. 1s tolerance) is proposed by Financial Industry Regulatory Authority (FINRA) with Securities and Exchange Commission (SEC) Proposed a rule to reduce the Synchronization Tolerance for Computer Clocks to be 50 ms that are used to record events in NMS (National Market System) Securities and 1s for mechanical time stamping devices used for OTC (Over-The-Counter) Equity Securities. Approved by the Federal Register on April 8 th 2016 Implementation from Feb 20 th 2017 REF: arorap@nplindia.org 9

10 Formulation of Regulation by ESMA May MiFID (Markets in Financial Instruments Directive) proposed amendments in: 2002/92/EC In developing the draft regulatory technical standards on which this Regulation is based, ESMA has conducted open public consultations, analysed the potential related costs and benefits and requested the opinion of the Securities and Markets Stakeholder Groups. Dec MiFID (Markets in Financial Instruments Directive): Draft regulatory technical standards on the admission of financial instruments to trading on regulated markets RTS-25 (Regulatory Technical Standards): Level of accuracy of business clocks June European Parliament passed the regulation [ 2014/65/EU MiFID II ] Planned to implement on Jan but postponed and implemented from Jan 03 rd 2018 arorap@nplindia.org 10

11 Technical standards for business clock synchronization Regulatory Technical Standards (RTS 25) Article 1 Business clock that gives the time stamp for any reportable event should be synchronized to UTC by any of the traceability techniques available. Article 2 Level of accuracy that should be maintained by the operators of trading venues Article 3 Level of accuracy that apply to members or participants arorap@nplindia.org 11

12 Regulations regarding time stamping Internationally Country/ Union United States of America Rule no Regulatory Notice Authority Proposed by FINRA approved by SEC Year of Origin April 2016 Current Status Implemented from Feb 20th 2017 Reference Time source NIST Synchronisation requirements with respect to reference source Computer Clocks Mechanical Clocks 50 ms 1 s European Union MiFID II (RTS- 25) ESMA (European Securities and Markets Authority) May Implemented from Jan 3rd 2018 UTC Manual Orders Automated Orders ( non HFT ) HFT 1s 1 ms 0.1 ms India Circular: CIR/MRD/ DP/09/2012 SEBI (Securities & Exchange Board of India) 2012 March 30 th 2012 Any atomic clock HFT time stamp resolution Stock Exchange Clock 1 µs 1ms arorap@nplindia.org 12

13 Review of Indian Finance Market SEBI Finance Sector RBI CAPITAL MARKET MONEY MARKET Primary Market Secondary Market Banking NBFCs Stock Exchanges SEBI: Securities and Exchange Board of India RBI: Reserve Bank of India NBFC: Non Banking Financial Company 13

14 Scenario of Indian Stock -market SEBI has approved list of 7 stock Exchanges and 5 Commodity Derivative Exchanges there are 7,850 registered Stock Brokers & 21,431 Sub-brokers registered with SEBI Indian finance market has a turnover of INR 20,00,000/- Cr per month and INR 2,00,000/- Cr (27 billion USD) per day As per the SEBI circular dated 11/2/1997 every transaction has to be time stamped. India-INX Since 2017 Round trip latency of 3μs Since 1992 Different Technologies used for Trading in stock Exchange 1. Mobile trading 2. Algo trading 3. Co location facility 4. Smart order routing 5. Proximity hosting 6. Security trading through wireless technology 7. Computer to computer link software 8. Internet based trading etc., India-INX: India International Exchange BSE: Bombay Stock Exchange NSE: National Stock Exchange Round trip latency in ~ ms BSE Since 1875 Round trip latency of 6μs arorap@nplindia.org 14

15 RS 30,00,000 Indian Capital Market Turnover Value of the shares Traded (INR in Crores) 1 crore = 10 million BSE: Bombay Stock Exchange NSE: National Stock Exchange RS 25,00,000 RS 20,00,000 RS 15,00,000 RS 10,00,000 RS 5,00,000 RS Total BSE NSE Indian Market YEAR Value of the Indian capital market in Last 7 years Number of cases taken up by SEBI in Market Manipulation and price rigging Cases arorap@nplindia.org 15

16 Fraction of Seconds worth Cores of Rupees 16

17 Current Indian Regulations for Financial Trading SEBI Guidelines 2012 In India SEBI (Securities and Exchange Board of India) which is the regulatory authority for the Capital market has issued a circular on 30 th March 2012 titled Broad Guidelines on Algorithmic Trading The stock exchange shall synchronize its system clock with the atomic clock before the start of market such that its clock has precision of atleast 1 μs and accuracy of at least ± 1 ms SEBI Guidelines 2017 SEBI issued Guidelines to all stock Exchanges on 20 th January 2017 titled Fair and transparent access to data feed of the stock exchanges. In this guidelines also, SEBI repeated its previous regulations. As the guidelines do not talk about reference time, the stock exchanges have set-up their own PTP synchronized networks which are referenced to GPS. There is no synchronization from one exchange to other and to other financial institutions and user networks. This is causing chaos! arorap@nplindia.org 17

18 Need for New Regulations in Indian Markets Recently SEBI has extended the trading time of equity derivatives from 3:30 PM to 11:55 PM which aims in attracting foreign investors in Indian products and to have an integration of stocks and commodities in a single exchange which will come into effect form In this contest to have proper fare trading in a stock exchange for both the foreign investors who may be in different time zone and the Indian investors equally, it is very important for all of them should have their transactions traceability to UTC. All financial institutions in India should have traceability to one common reference UTC(NPLI). India is going to be a 5-Trillion-dollar economy by 2022 which will definitely be done by digitalization which increases the rate of the digital transactions in the country drastically. This causes attention to bring reforms and stricter regulations. arorap@nplindia.org 18

19 Possible Time Synchronization Solution for Indian Financial Sector An appropriate combination! Traceable to UTC (NPLI) via CV-GPS and domestic TWSTFT CV-IRNSS IRNSS Signal CV-GPS UTC (NPLI) Steering algorithm Atomic clock Steering algorithm Time Audit Optical fibre link Bunch of network time servers Performance check Distribution to all devices on network Robust Network Architecture at a Financial Hub IRNSS: Indian Regional Navigation Satellite System (developed by Indian Space Research Organization) also known as Local-GPS arorap@nplindia.org 19

20 Acknowledgements: Dr. D. K. Aswal, Director NPLI for his constant support and encouragement. All colleagues of Indian Standard Time (Time and Frequency) Division at NPLI for their valuable inputs. 20

21 Thank you for your Attention 21