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Algo Trading

How to Source Market Data for Algo Trading?

market data in algo trading | marketfeed

Algo trading involves the use of computer programs or ‘algorithms’ to execute orders in the financial markets (stocks, currencies, commodities, derivatives, etc.) based on pre-defined conditions. These conditions include price, timing, and quantity instructions. It’s become extremely popular among many traders globally due to its high speed and efficiency. And one could argue that the first step in algo trading is collecting market data! This data has to be accurate and precise to form an effective algo trading system.

The amount and type of data required depends on your approach to algo trading, i.e. whether you code your strategy or use pre-built strategies. Traders using third-party platforms need not worry about collecting data. In this article, we will provide a complete overview of various market data sources, the associated costs, and a detailed analysis to help you make informed decisions

What is Market Data and Why Do We Need it?

Just as good-quality ingredients are crucial for cooking up a delicious meal, high-quality market data is essential for backtesting and executing successful trades. Market data refers to trading-related information on the prices and volume reported by exchanges (like NSE or BSE in India). Without this data, a trader won’t be able to form any strategy or place orders in the market. 

A trader needs to collect three types of market data for algo trading; real-time data, delayed data, and historical data. Real-time data is used while a trader executes an order, it is taken into account at the time of the trade. Delayed data refers to market data made available after a short period, usually ranging from 1 minute to 15 minutes. Historical data (collected from past events) is used for analysis and backtesting strategies. It checks whether the strategy would have worked well in previous markets and gives a green signal to the trader. 

Why Good Quality Market Data is Important for Trading:

  • Forming your Strategy and Backtesting: By collecting past market data, traders can notice patterns and form strategies. These strategies can be backtested to gain confidence and make sure there are no major flaws. A trader must always backtest their strategy before deploying it in the current market.

    Read: Ultimate Guide to Backtesting Algo Trading Strategies
  • Monitor and Adapt: Regularly analysing and gathering market information allows traders to make timely adjustments as the market fluctuates. This is where real-time market data becomes essential. On the other hand, delayed data is typically used for research, analysis, and educational purposes. Examples of institutions that offer delayed data are Yahoo Finance, Bloomberg, and Reuters.
  • On-spot Execution: Real-time market data allows traders to execute trades on time, reducing slippages and increasing accuracy. If there is latency (lag), orders will be placed based on delayed information which can reduce profits. 

Market data is very crucial to the entire trading process. You can make informed decisions and execute trades with the right sources to collect this data. Let us see what these sources are!

Sources of Market Data for Algo Trading

Now that we have understood the importance of market data, let us break down the sources and costs involved in collecting market data:

1. Stock Exchanges 

In India, traders can access market information from stock exchanges like the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE). NSE Data & Analytics Ltd provides market data from the NSE, including quotes and data across the capital market (equities), currency derivative market (CDS), futures and options (F&O), and much more. The data is available in different levels: Level 1 shows the best buy and sell prices, Level 2 displays up to five top prices, Level 3 covers up to twenty, and tick-by-tick data captures every single market movement.

The cost of directly collecting information is quite high. However, brokers access live data provided through subscriptions to the NSE. Apart from that, for real-time stock-wise data, NSE charges a tariff of ₹10,000 per year for a single stock and ₹25,000 per year for up to 5 stocks (with an add-on of ₹2,500 per stock for up to 10 stocks). 15-minute delayed data is provided at ₹1,00,000 per year for the Capital Market and F&O segment. Historical trade data for researchers’ use is provided at ₹18,000 annually in the capital market and F&O segment. [These costs are as of August 2024].

Traders who wish to enhance the speed and efficiency of trade execution and obtain an edge over other traders will have to pay a fee for co-location services and set up advanced infrastructure to access the data as well.

[Co-location refers to the service of setting up servers closer to the exchange. This improves connectivity and reduces latency or delays in collecting data.]

BSE has its own set of tariffs that are different from NSE. Collecting data officially from the stock exchange is quite costly and complex. As a result, this source is mostly used by big institutions rather than retail traders. 

2. Authorised Data Vendors

Data vendors are companies that specialise in providing essential market data, which includes real-time and historical information about financial instruments such as stocks, commodities, and currencies. Authorised by the stock exchange, these companies distribute accurate real-time and historical data without much latency or delays. They provide Open, High, Low and Close (OHCL) price, End of Day (EOD) data, and volume data. Data vendors also help integrate various software platforms needed for charting and technical analysis. 

Platforms like TrueData, Global Datafeeds, and Accelpix offer market data services through monthly subscriptions, with costs varying based on the segment and features you need. These platforms not only provide raw data but also decode it to reveal patterns that traders can analyse.

Data vendors provide an all-in-one solution for acquiring market data, ensuring traders receive comprehensive information from start to finish. This option is ideal for institutional traders who require large volumes of data for efficient analysis.

Broker Platforms 

Several brokers in India provide trading APIs that allow users to build custom trading platforms and automate their strategies. [An API is a set of protocols and tools that enables software to interact with data vendors and place orders on different trading platforms, exchanges, or brokers.] These platforms usually allow users to access data free of cost after signing up. They provide all the necessary information like ask/bid price, volumes, OHLC, last traded prices, etc, in a user-friendly and easy-to-read interface. 

Zerodha Kite, Upstox, Fyers, and 5paisa Capital are some examples of such data service providers. They also provide historical data in the capital market ranging from 1-day to 5-year trends, along with the execution services to carry out your trade. These companies collect their data from official sources and restructure it for the retail market, making it the optimal choice for individual traders. 

Conclusion

Market data is an indispensable part of algo trading. Whether you code your own strategy or use existing strategies, regular market data is extremely essential to execute successful trades. In trading, one must move quickly and make dynamic decisions, which is possible by keeping a check on data trends. 

Stock exchanges and data vendors are great sources for institutions. Retain traders can use broker APIs as it’s more economical. As a trader, you must be quick and analytical, and good-quality data is the way to go!

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Editorial

SEBI Proposes T+1 Settlement Cycle on Optional Basis: All You Need to Know

nse T1 holdings

Earlier this week, the Securities and Exchange Board of India (SEBI) announced that stock exchanges would have the option to move to a T+1 (Trade Date+1 Day) stock settlement cycle starting from January 1, 2022. While many have welcomed the proposal, a lot of concerns have emerged regarding the implementation of the new system. In this article, we take a closer look at how this move could impact the stock exchanges and market participants.

What is the T+1 Settlement Cycle?

Stock exchanges around the world follow a well-defined clearing and settlement system. Since 2003, India’s NSE and BSE have been offering the T+2 settlement cycle. Here, ‘T’ stands for the date of transaction, and ‘2’ denotes how many days later the transfer of stock ownership and payment to the buyer and the seller, respectively, takes place. Let us look at an example.

Suppose you buy 100 shares of ITC Limited at Rs 200 per share on September 1. The total buy value is Rs 20,000. The day you make the transaction is referred to as the trade date or ‘T Day’. An amount of Rs 20,000 (plus all applicable charges) will be debited from your trading account on that date. On T+1 (Sept 2), the amount required to purchase the shares is collected by the exchange. The exchange transaction charges and Securities Transaction Tax (STT) is also collected. On T+2 (Sept 3), the shares are debited from the Demat account of the person who sold you the shares and credited to the broker with whom you are trading. The broker will then credit the 100 shares to your Demat account. On T+2, the amount that was debited from your end is credited to the person who sold the shares.

Now, SEBI has introduced a shorter settlement cycle— the T+1. Once you place a buy order for a stock, the entire settlement process will be completed within the next day. A stock exchange will have to give at least one month’s prior notice to the public regarding the move to a T+1 settlement on any stock. After opting for a T+1 cycle for a stock, the exchange will have to mandatorily continue with the same system for a minimum of six months.

How Will This Move be Beneficial?

The move to a T+1 cycle will accelerate the entire settlement process. It would benefit retail investors as they will get quicker access to cash and securities (shares) after trades are executed. Moreover, it will reduce the risks associated with fluctuations in share prices during the settlement cycle.

A shorter settlement cycle will provide greater flexibility to the stock exchanges. It will make them more efficient, free up capital, boost liquidity, and reduce default risks. [Default risks refer to the inability to make timely payments]. NSE and BSE had moved from a T+3 cycle to T+2 on similar grounds in 2003. 

Concerns Regarding SEBI’s Proposal

Zerodha co-founder Nithin Kamath posted a tweet stating a potential complication of the move to a T+1 settlement cycle. He said the concerned authorities may need to figure out how the settlements will work if one exchange adopts T+1 and the other is on T+2 when the same stock trades on both exchanges. A mismatch in the settlement cycle will prove to be confusing and chaotic for investors and traders. It may affect trading volumes as well. However, many experts argue that either NSE and BSE will both move to the T+1 cycle, or both will stick to the current regime.

Many operational and technical challenges need to be tackled before implementing the T+1 settlement system. All institutions involved in the stock market (brokers, exchanges, banks) will have to increase their efficiency for the delivery of shares and exchange of money within one day. This move will lead to an increase in the working capital requirements for brokers. Banks and depository participants will face extended working hours. These institutions could pass down the costs to us investors and traders.

Pressure from FPIs

T+1 might prove to be difficult for certain classes of institutional shareholders. The Association of National Exchange Members of India, the Asia Securities Industry and Financial Markets Association (ASIFMA), and overseas traders have expressed concerns over the operational and technical implications of the move. Since working hours in the US and Europe are not aligned to Asia Pacific markets, T+2 settlement effectively functions as T+1. Any error or disparity in a transaction is normally discovered on T+1. Thus, shortening the settlement cycle could lead to high costs and settlement risks for Foreign Portfolio Investors (FPIs). 

A move to a T+1 cycle in India would mean that FPIs will have to keep money and shares ready with them on the day of the transaction. Thus, inflows from foreign investors would be adversely affected. FPIs have written to SEBI regarding a potential reversal of market gains due to unforeseen consequences of moving to the new system.

What are your views on SEBI’s proposal for a move to a T+1 settlement cycle? Let us know in the comments section of the marketfeed app.

Categories
Editorial

NSE VS BSE | How NSE Beat BSE to Become India’s Top Stock Exchange

Stock exchanges are the powerful platforms or marketplaces that allow us to invest or trade in securities. Most beginners in the stock market have a doubt regarding the exchange they should transact in— whether it should be BSE or NSE. In this article, we dive into the two prominent stock exchanges of India. We shall also analyse the factors that helped NSE become our country’s largest stock market exchange.

A Brief Profile on NSE and BSE

The Bombay Stock Exchange (BSE) was established way back in 1875. Located in Dalal Street, Mumbai, it is the oldest stock exchange in Asia. There are more than 5,400 companies listed on the BSE. Its benchmark index, the S&P BSE Sensex, is widely tracked by investors across the globe. The Sensex (Sensitive Index) tracks the performance of 30 of the largest and most actively traded stocks on the BSE. As of 2020, BSE is the 10th largest exchange in the world in terms of the cumulative market capitalisation of all companies listed on its platform.

The National Stock Exchange (NSE) was incorporated in 1992. It is also located in Mumbai. NSE is ranked the third-largest stock exchange globally in terms of the total number of trades in equity shares. There are more than 1,600 companies listed on the NSE. It is the first bourse in India to implement electronic or screen-based trading. The Nifty 50 is NSE’s benchmark index that represents the weighted average of 50 of the largest companies listed on its platform.

Both NSE and BSE provide a platform for companies to raise funds efficiently. The exchanges allow investors to trade in equities, currencies, debt instruments, derivatives (F&O), and mutual funds. Moreover, they provide services such as risk management, clearing and settlement, and investor education. The exchanges operate under the strict guidelines of the Securities and Exchange Board of India (SEBI).

Factors That Led to the Rise of NSE

For more than a century, BSE had complete dominance over stock trading in India. To break this monopoly and improve transparency in the capital market, our government decided to create the NSE. It was India’s first computer-driven stock exchange and was promoted by some of the leading financial institutions at that time. NSE was given the right to set up trading terminals across the country, while BSE was not allowed to do so. [Trading terminals are intermediary software that allows investors and traders to place buy/sell orders without having to call their brokers]. Meanwhile, it took a few years for BSE to receive permission for the same.

Thus, NSE was able to capture a significant portion of share trading across India. They used state-of-the-art technologies to ramp up the performance of trading systems. NSE was the pioneer of automated and paperless trading in the Indian market. It set up the first depository— the National Securities Depository Ltd (NSDL), which initiated the demat revolution in the country. NSE was also the first stock exchange to establish a clearing corporation (NSE Clearing Limited), which helps reduce trading and settlement risks in the market. 

With the arrival of NSE, investing and trading in stock markets became highly transparent, efficient, and less costly.

High Liquidity

Ever since NSE was established in 1992, there has been fierce competition between the two bourses for attracting more trading volumes. Higher volumes would ultimately allow exchanges to obtain more revenue. More importantly, it would lead to better liquidity, an aspect that is vital while trading in shares and derivatives. Higher liquidity allows traders to quickly and easily buy or sell shares at the exact price specified by them. 

As a result of its revolutionary offerings, NSE has the highest average daily turnover for equity shares than any other stock market in India. The turnover for an exchange refers to the overall value of shares traded during a certain period. 

Let’s look at an example. On July 12, 2021, around 15.76 lakh shares of Reliance Industries were traded on the BSE. At the same time, ~39.6 lakh shares of RIL were traded on the NSE— more than double! Since NSE has high trading volumes, the price a buyer offers per share (bid price) and the price the seller is willing to accept (ask price) will be fairly close to each other. This helps intraday and swing traders enter and exit a trade at the exact price specified by them and realise their targets.

Trading in Derivatives

For those who are not aware of what derivatives trading really is, here’s a quick explanation:

A derivative is an instrument whose value is derived from an underlying asset. The underlying can be a stock, commodity, index, etc. Derivatives are used by large institutions or traders to hedge risk and to speculate on price changes in the underlying asset. Futures and options (F&O) are the most common types of derivatives trading.  An agreement (or contract) can be formed between a buyer and seller to buy/sell a predetermined quantity of the underlying asset at a specified price on a specified date. You can learn more about basic options terms here.

Coming back to the point, NSE has always been the most liquid exchange for derivatives. It is the undisputed leader when it comes to futures and options (F&O) trading. This is clear when you compare the volumes (options chain) of F&O activated stocks on NSE and BSE. In most instances, there are zero contracts formed in BSE. On the other hand, NSE’s Nifty 50 and Bank Nifty are traded heavily in the stock market.

Conclusion

Despite its exceptional growth, NSE lags behind BSE on one aspect: the brand. Sensex is still widely used across the world to measure the health of the Indian markets and the economy. 

To summarise, NSE is the preferred exchange for intraday, swing, and derivatives trading due to high liquidity. If you are a long-term investor, it does not really matter where you buy/sell shares. However, BSE gives access to more than 5,000 stocks across various sectors. There could be a minor/insignificant difference in the prices of scrips in NSE and BSE. The costs related to investing and trading are similar for both exchanges.

Over the past few years, stock exchanges have come under the scanner due to frequent technical glitches. You may recall the four-hour-long halt in NSE’s trading system that occurred in February 2021. The exchange informed that the instability of telecom links from two of its service providers had affected the functioning of its risk management system. Unfortunately, it resulted in heavy losses for investors. There was a complete lack of accountability from NSE.

Recently, SEBI came out with a standard operating procedure (SOP) to curb technical glitches in stock market operations. NSE and BSE could face a penalty of up to Rs 2 crore or more if they fail to respond to technical disruptions within 30 minutes and restore operations within 45 minutes. Stock exchanges and other market infrastructure institutions (MIIs) will have to submit a root cause analysis report within 21 days of an accident.

Let us hope such events do not occur in the future!