Speed and Latency in U.S. Equity Markets

Transcription

1 Speed and Latency in U.S. Equity Markets Austin Gerig Division of Economic and Risk Analysis (DERA) US Securities and Exchange Commission The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author s colleagues upon the staff of the Commission.

2 Part I Overview Regulation of Clock Sync in U.S. Equity Markets Part II Speed and Latency in U.S. Equity Markets

3 Why Important/Interesting? Clock Sync Allows sequencing of geographically separated market events Speed/Latency Better queue position in order books First response to news events Fast arbitrage Portfolio arbitrage (Futures to equities, ETF s, etc.) Latency arbitrage (Flash Boys) Latency Fluctuations Determination of non-compliance with regulation Determination of when data feeds are unreliable

4 Part I: Regulation of Clock Sync

5 FINRA Rule for Broker/Dealers Firms have until Feb 17, 2017 or Feb 20, 2018 to apply the new clock sync standard (the current standard is within 1 second of NIST). Sources: FINRA manual, Rule 4590 and

6 SIP Plan Requirements for Exchanges Exchanges use a clock sync methodology ensuring that timestamps are accurate within tolerances of 100 microseconds or less. source: salerts/2014/utp/utp pdf

7 Upcoming CAT Requirements Implemented in phases between Source: Approved CAT NMS Plan

8 Part II: Speed and Latency in U.S. Equity Markets

9 Different types of latency Latency of algorithmic strategies FPGA (~1us) Latency from trading system to matching engine Co-location (~25-50us) Latency between trading venues* RF - Laser/Microwaves (~ us) *Focus of the rest of the talk

10 Preliminaries Exchange-to-SIP Latency The time elapsed between a message being sent from an exchange, and it being received by a Securities Information Processor (SIP) Currently recorded in microseconds (a blink of an eye takes 150 milliseconds or 150,000 microseconds) SIP CTA (Tape A and Tape B securities) and UTP (Tape C securities) TAQ data (trade and quote data) Publicly available data containing SIP messages: equity trades and quotes. Each trade/quote entry contains information regarding when the message was sent by an exchange to a SIP, and when the message was received by a SIP

11 Minimum Exchange-to-SIP Latencies Figures: Speed of light latency from NYSE/ARCA, BATS/Direct Edge, and IEX to and from NASDAQ. Left: Direct line of sight through air. Right: Following roads through fibre optic cable. Source: Internal calculations and Google maps.

12 Measured vs. Minimum Latency Source: TAQ data and calculations from previous slide.

13 Latency is not constant, it fluctuates intraday and over time NASDAQ to UTP SIP latencies for AAPL Trades. Source: TAQ data.

14 Pareto type IV distribution best fits intraday fluctuations Distribution of NASDAQ to UTP SIP latencies for AAPL Trades. Source: TAQ data.

15 Exchange to SIP latency distribution Pareto IV parameters Best fit parameters for Pareto IV distribution of exchange to UTP SIP latencies for AAPL trades. Source: TAQ data.

16 Exchange to SIP latency distribution Pareto IV plots Source: TAQ data.

17 UTP SIP upgrade on 10/24/16 Source:

18 Observed changes for BATS to UTP SIP latency due to upgrade. Source: TAQ data.

19 Clock drift is observable Source: TAQ data.

20 Conclusions Latencies between trading venues fluctuate intraday and through time (they are not a single value) Pareto IV distribution best fits these fluctuations Exchanges have different parameters for the distribution, but those parameters are interpretable and related to: geographic distances technological infrastructure possible universal behavior of network delay Technological upgrades can have significant effects on latency Clock drift contributes to latency fluctuations and is observable