Keeping Stock Trades Fair

The popular image of stock markets may be stressed-out people scampering around on a trading floor. But the reality is that more and more transactions are made by machines. In recent decades, high-frequency trading has accounted for more than half of all stock trades in the U.S. These transactions are executed in fractions of a second. Because every buy or sell order changes the value of a stock, clocks used to time markets need to be fast enough to keep up with split-second trades.

To ensure that trades are executed in the correct order, each one must be recorded and time-stamped. Time-stamping also creates an audit trail ensuring that each player in the stock market gets the correct value for the stock they’re buying or selling.

And to ensure that time stamps are accurate, regulators require every clock involved in a stock market transaction to be synchronized to a common reference clock. In the U.S., the common reference clock is UTC(NIST), which is a NIST-produced time scale based on an average of atomic clocks around the world.

Learn more about UTC(NIST).

Clocks involved in automated trades in the U.S. must stay within 50 milliseconds (thousandths of a second) of UTC(NIST), and many exchanges synchronize their clocks more closely than that. In Europe, clocks involved in high-volume trading must be within 100 microseconds (millionths of a second) of the time provided by an atomic clock involved in keeping universal time.

Stock exchanges can ensure accurate time stamps by synchronizing their computer clocks to an atomic clock. But even an atomic clock, operating independently, will gradually drift away from official time. So stock exchanges take advantage of NIST’s Time Measurement and Analysis Service. NIST, for a fee, provides a calibrated commercial atomic clock (or the customer provides their own clock), and NIST continuously compares the commercial clock to UTC(NIST) using a technology called “common view.” Common view takes advantage of the fact that at any given time, at least one GPS satellite will be in view of both NIST and the stock exchange.

NIST-provided clocks synchronize some of the world’s largest stock exchanges and are installed at data centers near cities such as New York City, Chicago, London, Frankfurt and Tokyo.

Learn more about how NIST’s time division supports the financial industry.

Next: Atomic Time for a Networked World