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Financial markets move on the basis of data. If one party consistently receives information faster than the others, then the said party is statistically likely to consistently make more money as compared to other parties because of this data advantage.
There are several pieces of data that are important while trading in the stock market. There are some pieces of data like the company’s balance sheet and profit and loss account. This data makes it possible to conduct a fundamental analysis of any given company. On the other hand, there is another type of data called market data.
In simple words, market data means information relating to prices and volumes of a particular stock or bond which are being traded on the market. This data provides more clarity about the behavior of the stock on a financial market. Hence, it is called market data.
In this article, we will understand what market data is and why it is important in the financial markets.
As mentioned above, market data is data relating to the behavior of a particular stock or bond in the financial market. This data is collated and analyzed in order to fully understand the risks which an investor may have to take if they invest in a particular security.
Market data generally consists of the following types of information:
When large volumes of securities are being transacted at a given price, it is highly unlikely that the price has been manipulated. This is because the manipulation of entire markets is generally beyond the capability of a few traders.
For instance, if the promoter of a company is selling the shares of that very company, it could mean a negative sign for the company.
Bulk deals lead to sudden price changes. Market data publishes this information in advance allowing retail investors to take corrective measures.
It needs to be understood that market data is extremely time-sensitive. This means that this data is analyzed, and decisions are made within minutes of receiving this data. Therefore, if the data is received after a time lag, it is useless to investors. This is the reason that investors try to cultivate a source from where they can obtain this data faster than their peers.
Large investment banks have been known to relocate in physical proximity of the exchanges in order to obtain data a few milliseconds faster than their peers.
Also, some investment banks have invested their own money to lay a dedicated fiber optic cable, which would enable them to receive the data faster. These banks have special algorithms with built-in capabilities that allow them to undertake automated high-frequency trading in order to take advantage of the information advantage they have over their peers.
The market data related to the behavior of any stock is obtained through a single source i.e., the stock exchange. Hence, the fastest way to get the data would be to get connected to the exchange. However, most stocks today trade on multiple exchanges. As a result, there is a need for an intermediary who can collate data from several sources and present it to the investors in a pre-determined format.
The bottom line is that market data is an important component of the financial system. There are a lot of services and activities which would become redundant in the absence of timely availability of market data.
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