Potential risks of data feeds and quotes

Author: Ivan Egorov

The trading platform and the liquidity bridge are the two components that are typically called the heart and soul of the brokerage. The data feeds, however, are equally important because they have a direct impact on the quotes and, consequently, a broker’s profitability.

Several issues can occur with regards to data feeds and quotes. Today, we will focus on the business-related ones. For more information on the technical side of it, please feel free to email us at sales@t4b.com to speak with a member of our team.

The biggest concern with poor-quality data feeds is that they can be abused and cause significant financial damage to the broker. We will talk through the most common risk factors to help brokers avoid any unnecessary risks:

1. Quote latency

When brokers get their quotes from a middle-man rather than directly from an LP, it might take more time, and, as a result, the end price differs from the numbers you saw with the original LP. If clients have access to the initial LP pricing and are aware of such a dynamic, they can use software solutions to profit from it. When markets are volatile, brokers can experience considerable loss even with short delays.

2. Non-market quotes

The quality of the data feed is very important. One of the key criteria here is the absence of non-market spikes and gaps. Clients might check your quotes with other sources and open orders to profit on spikes and gaps in your platform. If that happens, brokers are faced with a choice of cancelling such orders and risking their reputation or letting them happen and experiencing the financial loss.

3. Fixed spreads

The risk with fixed spreads occurs when LPs have spreads that are several times wider than the broker’s spreads. That can cause an imbalance in the value of the bid or ask quote. Clients with special software can track these occurrences and use these vulnerabilities to their advantage.

4. Quotes filtering

Quotes filtering could be a reason for and the solution to the problem. It is sometimes used for managing poor data feeds but can result in quote delays. Also, if brokers keep on filtering the quotes to remove all non-market gaps and spikes, they more often than not end up filtering out the actual market spikes. Like with previous examples, certain types of clients might use technology to track these events and use them to make extra profit.

What can you do with these risks?

We cannot eliminate the risks associated with quotes and data feeds entirely. However, we can take a few steps to minimise the impact that they might cause:

  • Aggregate quotes from different sources
  • Make sure your quote sources are reliable
  • Partner with trusted technology providers
  • Do quotes filtering but mindfully
  • Look into quotes management software
  • Go 100% STP for all your orders :)
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