Everything you should know about quotes
Author: Alexey Kutsenko
Today we will talk about such component of the trading platform as DataFeed and discuss some of the aspects of getting quotes from liquidity providers (LP). All of the following will be equally applicable to any trading platform, however it is necessary to take into account the architecture of specific platform. I don’t want to explain information that can be found in the manuals and make my text understandable only for technicians. Therefore, I will only draw your attention to the important points that may lead your company to financial losses, if not under control.
Before we start I should mention, that the problems we are going to discuss hardly affect brokers using 100% STP model with execution of all orders on the market. In this case the price of client’s order execution is set by liquidity provider at the moment of execution.
So, I would like to start with a simple truth: do not underestimate the problems that can be caused by poor-quality quotes.
The first problem that can affect broker’s performance– is quotes lag. When you’re getting quotes to your platform not directly from the tier-1 liquidity providers, but from the secondary quotes providers (e.g. from other brokers), you just get additional mediator in the quotes supply chain. In this case, the quotes on your server will have a time lag and the prices will digress from the quotes of the original provider. Clients having access to the quotes of initial provider and special software will be able to play against you, knowing the direction of the trend in advance. In case of high volatility on the market, even a short delay can lead to considerable losses.
The second problem - is the quality of the quotes source. Quality is defined by the absence of non-market quotes (spikes) and gaps. Customers can compare your quotes with the more qualitative quotes source and open profitable orders on spikes and gaps in your platform. You have to either cancel such transactions with the threat of damaged reputation or accept the losses coming from such customers.
Anyway, brokers using Market Maker model and Instant Execution type should keep an eye on their quotes sources, as well as use the DataFeeds with direct connection to liquidity providers and minimal price modifications (filtering, markups). For example, you can use our DataFeeds compatible with most major LPs and showing low latency.
Another point that is worth paying attention is the fixed spread. Many Market Makers offer it to clients. At the same time liquidity provider may have spread that is 3-5 times greater than broker’s. Often there is no actual price movement, but simply widening of the spread, however as broker is offering fixed spread, the value of bid or ask quote will be far from its actual level. One can easily calculate it having the quotes from similar broker. In such rare moments clients having special software can open predefined profitable positions. Thus, fixed spread also bears some risks in itself. This should be taken into account when you decide to work with fixed spread.
The aforementioned problems can be more or less solved by aggregation of quotes from different sources or by quotes filtering, but don’t rely on the use of multiple sources and filtering only. You should bear in mind that any interference in quotes stream consumes time and can turn into quotes lag problem on your server. You should be careful with filtering too, because filtering out non-market gaps and spikes sooner or later may lead to the situation when you filter out the real market spike and abusers will immediately take advantage of it.
Unfortunately, there is no single solution for all the problems. Every situation needs a thorough analysis on your servers. You can get acquintained with some tools for protection against quotes and execution delays on our site. If you encounter any feed problems, contact us and we will advice on how to solve them.
Read the original article on Finance Magnates.
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