|Fool the trading clock and bad things happen. While it's unlikely damage has yet been done by time thieves, there's significant potential for trouble.|
The price of a deal depends on when it gets done. The faster deals close, the thinner the slice of time needed to accurately price the transaction. Trading intervals of thousandths, millionths and, yes, even billionths of a second are now commonly measured. And unknown to many, these tiny fractions of a second are sliced by using readily available global positioning technologies. Who knew, but the GPS tools that tell your iPhone and Droid where the nearest lattes are are the same ones markets use to track the time trades close. "Though we do a lot with the time signals we get from the GPS system, that is the basis for much of the time-stamping we do," says Andrew Bach, senior vice president and global head of network services for the NYSE.
Here's the scary part: Humphreys says the right person with the right tools can fool these GPS-based time systems. There are really two GPS networks: an encrypted signal used by the U.S. military and a public one available to everyone, including trading markets. Humphreys says sophisticated actors using spoofing technology on this unencrypted GPS system might blind an exchange's clocks. But he states firmly that the disaster scenarios -- a Dr. Financial Evil holding markets hostage -- are unlikely. Nobody knows how markets will react in a forced GPS outage, so designing a profitable strategy is slippery. Spoofing requires technical sophistication and patience. Plus, major trading systems take major precautions. The New York Stock Exchange says it uses a number of backups, including highly accurate atomic clocks, and other tools it would not disclose, to keep time over an extended period in case of GPS outages, which it says are more likely to be caused by natural phenomena such as solar storms. "Spoofing attacks are pretty low on my list of concerns," Bach says. Direct Edge, BATS Exchange and Nasdaq did not comment in time for this column, but Humphreys says they all likely use similar backup systems. "They're not going to spare much expense in getting a good timing signal," he said. The risk is in so-called colocation.
Where trading time risks are real, Humphreys says, is in so-called colocation trading. These are the racks of trading servers that usually live within 100 meters or so of the main trading computers where electronic exchanges actually happen. That's the so-called matching engines, for you geeks at home. Humphreys believes there isn't the awareness there should be for the time risk run by traders who use these colocated servers. All investors need to do to get a feel for the danger in so-called "co-lo" time gone wild, Humphreys says, is go back in time to May 6, 2010, the day of the Flash Crash. While he doesn't believe GPS spoofing had anything to do with the this collapse, events reveal that when time gets wonky, markets get wonky. "Many algorithms running on the colocated servers pulled out of the market in response to the timestamp discrepancies," Todd says. When timing errors appeared, he says, high-frequency traders fled markets, a liquidity vacuum ensued and algorithms began a wave of destructive trades. Humphreys believes today's colocated traders run this kind of risk, because nobody knows if they are using the same rigorous GPS timing standards as the major trading hubs. "I'm worried because colos may not be tapping into the exchange's time," he says. Call your colo
Which, friends, puts the burden of managing the risks with GPS time exposure back on the traders' lap. In other words, it's time -- like right now -- to get on the horn with your financial trading solution provider and have a heart-to-heart about the time quality used in your trades. "You want to talk about overall reliability more than anything else," NYSE's Bach says. "And we do provide the same quality of time systems we use to those who want it, including co-lo customers. From there it's an internal conversation depending on whoever is architecting your system." We live in an interesting time, indeed.