.png){kind=logo}
It’s no surprise that data is incredibly important for trading platforms, just as it’s crucial with any online service. However, traders should know exactly how exchanges send out massive datasets, how brokers get these feeds from the market, and how they use them to accurately price securities and derivatives.
Market data begins with the exchange, whether it’s the NYSE, the NASDAQ, or an overseas organization. Every trading day, they log every trade in their order books. This takes in everything, limit orders, canceled orders, modified orders, and completed orders. Each order covers the ticker, the bid/ask, the time, and other pertinent details. Naturally, this results in a lot of data.
Every ticker generates hundreds to thousands of trades per second, all of which get logged. Experienced traders often refer to this log as “the tape” (a holdover from when it was literally printed on tape). There are also Bloomberg Terminals that show real-time market data to users who pay a high annual fee.
Just like Bloomberg Terminal subscribers, trading brokers pay a premium to get data feeds. They get it from market data vendors (including Bloomberg), who themselves use cleaned up data taken from exchanges or third-party consolidators. The Securities Information Processor does this in the US, providing a unified feed for all American exchanges.
With the dawn of High-Frequency Trading (HFT) run by algorithms, getting a near-instant data feed is essential for a fintech platform and its clients, traders operating in a market where HFT occurs.
Most platforms subscribe to these data feeds and plug them into their service. There, it interacts with the broker’s app/site and the charts they support. That’s enough for stock trading, where the spread is just the bid/ask, showing the highest or lowest prices the security is trading for. The gap between bid and ask will depend on the liquidity and volatility of the security.
Derivative trading is more decentralized. Forex and bonds trade over the counter (OTC) between dealers, which then get aggregated into useable data for trader-facing platforms. CFD contracts work differently, being a contract between a trader and a CFD broker that creates its own spreads. When CFDs speculate on underlying stocks, the broker still takes market data into account. They reference real security prices as logged by exchanges, then add a slight markup to the bid and the ask.
This means that ultimately, the size of the spread and the markup depends on volatility and liquidity. Small caps often have wider spreads for this reason. CFDs on non-stock entities, like forex and commodities, use the aggregated vendor data taken from OTC trades instead.
Modern exchanges wouldn’t be able to operate without the ability to capture massive amounts of data, repackage it, and redistribute it to platforms. Those platforms then allow retail traders to have their say in the market. Some CFD brokers add a small markup as the cost of doing business on a free platform.
The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication.
All information has been prepared by ActivTrades (“AT”). The information does not contain a record of AT’s prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.
Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk.
