Behind the Charts: a Brief Introduction to Market Data Vendors
What is market data?
If you’re new to the world of market data, you could be forgiven for thinking that the only important piece of information is the price. After all, when you open a chart, the price seems to be the main thing animating all the activity you see there. However, there’s a lot more to market data than just the last price at which an asset was bought or sold.
Any widely traded asset will generate an enormous amount of data. Even the price itself can be broken down further than just the number that you see on the ticker. That figure is only the price at which the last trade was made. Then you have the highest bid and the lowest ask prices, which tell you the best rates that sellers and buyers, respectively, can hope to currently secure (also known as “Level 1” data or the “Top of Book”). Beyond this you also have the rest of the order book, which is a list of all the different instructions to buy or sell that specific asset, in what quantities and at what prices (also known as “Level 2” or “Depth of Book” data). So, already, we’ve gone from a single figure (the current price) to an entire list of ever-changing numbers describing different prices and volumes.
But it doesn’t just end there. Market data also includes other information such as the symbol used to identify that asset, the name of the issuer, the exchange it trades on, what currency it’s priced in. For more complex assets you may have things like open interest and implied volatility (in the case of options), coupon level, issue and maturity dates (for fixed income securities) or front and back month data (in the case of futures contracts). Now picture all of these constantly changing data fields, multiplied by all the assets and asset classes currently trading all over the world.
What are market data vendors?
As we’ve seen, there’s a great deal more to those red and green candles that you’re greeted with when opening your favourite charting platform. Now, the origin of all that data and the manner in which it can be made accessible varies widely across venues. Assets like stocks, crypto and commodities are traded on exchanges, whereas others such as FX are traded over the counter (OTC) or via electronic communication networks (ECNs). To complicate matters even further, different venues use different connectivity protocols for streaming their data.
Imagine you’re a trader wanting to access some of this data, or a brokerage that needs to select specific symbols for its clients from a wide variety of data streams. In order to do so you would have to enter into separate agreements with each and every one of the venues that offer the data you require. There would also be different hardware and software requirements for connecting to each one. So, not only would you have to bear the cost of separate licensing agreements and different hardware and software setups, there would also be significant lead time, both in the brokering of these agreements and the development required to integrate them if you don’t already possess expertise in the various communication protocols.
This is where market data vendors come in. Essentially, market data vendors are third parties that specialise in the procurement, connectivity and provision of market data. They have almost single-handedly democratised the availability of market data and are partly responsible for making online trading much more accessible to individuals than it was in the past.
Why do they exist?
Before this novel breed of fintech company, anyone requiring access to market data had no other option than to go directly to the exchanges. Procuring market data in this way was both expensive and inflexible. You were essentially obliged to purchase entire bundles of market data, whether you required all the assets being offered or not. This had the effect of excluding individual traders as well as all but the largest of institutions from gaining access to all of this information. What market data vendors have done over the past decade or so is to massively simplify the process for accessing market data while simultaneously making it much more flexible and affordable. This has been achieved by going directly to the exchanges, establishing relationships and connecting to their streams, then “normalising” the data by making it available over their own proprietary protocols.
What are the benefits?
A much larger cross-section of market participants can now efficiently and affordably gain access to quality market data through these third party vendors. This has allowed individual traders and smaller brokerage firms to be much more agile and competitive. Market data vendors have also managed to greatly streamline the process of gaining access to market data as now there is only one licensing agreement that needs to be made and one connectivity protocol that requires development for.
Moreover, market data vendors are known to be far more business-friendly than the exchanges that they source their data from. Many have developed their own lines of products that allow for quick and easy integration with their protocols. As fintech firms they are also far more dev-friendly, and are often able to customise solutions specifically for their clients.
This tailored approach filters down to the data itself, which is now available in a far more bespoke manner than was ever possible before. When sourcing market data from a third party vendor you are likely to be able to pick and mix streams that can be tailored to your needs rather than being required to pay for redundant information that you don’t require.
Information is the life blood of markets. What we have witnessed over the past decade or so is a complete revolution in the way that market data is made available and distributed. This has allowed for previously excluded market participants and innovative new businesses to gain access to and make the most of otherwise siloed data. The information age has led to the democratisation of all manner of information and market data vendors are now carrying this process forward into the financial markets.
Next time: Join us in part two of this series on the democratisation of market data, where we will be discussing the role of market data vendors for the retail trading industry.
This article was written by dxFeed, a market data provider for the global financial industry, delivering information to wealth management companies, brokers, quants, and retail traders. The engineering team of dxFeed has developed a proprietary quote distribution system and compressing algorithms to deliver loss-free financial data with the lowest latency from a variety of exchanges around the world. Subscribe to dxFeed’s newsletter so as not to miss new articles educating about the world of market data.
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