Importance of Market Data in Financial Markets

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.

What is Market Data?

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:

  • Market data explains the price at which given security has been trading on the exchange. Data is maintained and stored over long periods of time. This market generated data is later analyzed in order to understand the volatility which is inherent in any given stock or bond

  • Price data is never published alone. It is always accompanied by volume data as well. This is because the price can be manipulated by market operators. Unscrupulous traders may buy and sell shares amongst themselves in order to artificially inflate prices. However, this manipulation can be easily spotted if volumes are taken into account. 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.

  • Market data also list down any bulk deals which are being entered into. This provides important information to the retail investor. 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.

How is Market Data Transmitted?

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.

Importance of Market Data

  • Market data is used to execute, buy, and sell orders in real-time. Investors make their decisions regarding buying and sell orders based on price data, which is being generated and communicated to them.

  • Automated trading orders such as stop-loss are also triggered based on market data. Hence, real-time transmission of prices is inevitable for traders following any sort of strategy in the open market

  • The market data generated can be used to conduct an analysis of the volatility of a particular stock. Different metrics of volatility such as beta which are used to predict risk are obtained from market data

  • Market data is used for historical analysis. This data is then compared with changes in fundamental data in order to look for a causal link between the two

  • Market data is used in techniques such as technical analysis. As a part of this analysis, real-time market data is studied in order to identify set patterns. These patterns help in predicting what the market prices will be in the immediate future

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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