A look into price providers
By Reem Bacha
22 December 2023
If you’ve read the previous two articles in this series of five, you’ll know that major financial institutions each have their unique ways of processing the rapidly changing market conditions. But there is another factor that further impacts pricing – the source of the quote.
Let’s dive into this often-neglected factor that also causes prices to vary across the markets.
An introduction to pricing
Pricing refers to both the price level of each instrument as well as the trading cost, which can be either just the spread - the difference between the ask (the price to buy) and the bid (the price to sell), or the spread + trading commissions.
The quality of pricing is not just about offering the lowest and most stable spreads, but is also about providing price levels that accurately reflect the market, while being transparent, stable (i.e., without downtime), and having a decent tick rate. All of this should be considered throughout the whole trading day, whether it’s during rollover, normal trading hours, or around news announcements.
The price a broker offers is influenced by various factors related to their sources of prices.
Let’s take a look at these factors now.
1 . The number of price sources
Brokers may rely on a single source or on multiple data feeds to get a comprehensive view of the market for each instrument. The more feeds a broker has, the more information they have about spreads, volatility, price levels, price interruptions, etc.
Having more data enables them to provide more accurate and competitive prices. It also allows them to compare pricing between sources and identify price and liquidity differences between them. This way, they can understand the quality and the risks associated with each source, for each instrument. For example, if all sources except one show the same price, the broker can check if the price that differs is off-market, and reconsider using this source. Also, if they use several sources, they aren't affected if one feed stops, as they have others.
2 . The quality of feeds
The quality of these data feeds is crucial. High-quality feeds provide real-time, accurate, and reliable market data with high tick rates, tight spreads, and prices that reflect market moves with no delays, e.g. after news. The spreads in these feeds are not inverted (i.e. ask prices do not drop below bids), and there are no spread spikes, whether on one or on both sides. Ideally, the prices are tradeable, and there are sufficient volumes available on each side.
It’s also important for price sources not to have any downtime, or in other words, for them to stop sending prices unexpectedly.
Brokers with access to superior quality feeds can offer prices that more accurately reflect the current market conditions, reducing their risk and therefore being able to offer better spreads to their clients.
3 . The quality of the connection to the price source
A high-quality, reliable connection to price sources ensures brokers receive real-time pricing information, essential for accurate, latency-free pricing.
This is particularly important in volatile markets or immediately after important news announcements, where prices can fluctuate quickly.
4 . The diversity of sources
In addition to the number and quality, the diversity of sources also matters.
Brokers who gather data from various sources, including different exchanges, tier-1 banks, liquidity providers, and other data vendors, can get a more complete view of the market. This diversity allows them to set prices that are more reflective of the global market situation.
5 . The broker’s technology
The technology a broker uses to make its own prices also plays a significant role in the broker’s ability to control, customise and improve their pricing relative to their price provider.
Are they feeding the price from a single provider directly into their MetaTrader platform? Are they aggregating several price sources using simple logic (e.g. aggregating by using best bid and ask prices from multiple sources) provided by their bridge provider?
Are they using a third-party aggregator whose logic is unknown to them and which they cannot control? Or do they have their own in-house aggregators with custom logic that can be tailored to each instrument and improved on the go?
The more control a broker has over the price they put out to clients, which is gained through custom technology specifically built for this purpose, the better the pricing and spreads the broker will be able to offer. E.g. if a broker has just one price provider feeding into their MetaTrader, there is no wiggle room, while a broker with several price feeds and custom logic on how to combine them into a single price to give to clients can offer more ticks which are very precise, with tailored spreads and more uptime.
6 . Network and system stability
Network and system stability are also important, because if a broker loses access to pricing due to a network interruption, or receives a price with a delay due to congestion, it is a clear problem.
Interruptions to the price feed or issues with price generation or transmission into the trading platform can leave clients without pricing and negatively impact their experience. Aside from clients not being able to trade, the interruption also costs the broker money in foregone trading revenue, and potential compensations paid to their clients who were negatively affected by the pricing disruption.
Pricing at Exness
At Exness, it is our DNA to develop our own, better-than-market solutions. This is why contrary to most other brokers, we have created our very own aggregators, which we regularly update and optimize.
They contain sophisticated mathematical models and complex logic tailored to each instrument, enabling us to provide better-than-market pricing & spreads. Making our own prices using our own logic gives us more confidence that our prices are an accurate representation of the real market and are safe from potential abuse due to bad pricing. This then enables us to pass this benefit to our clients in the form of lower, more stable spreads.
A tricky time for pricing is at rollover, which is at 5 PM NY time. Most market participants restart their systems at this time, leading to significantly lower trading volumes, as well as possible bid or ask spikes, as players remove pending orders from their order books.
Most brokers have wider spreads during this time, but at Exness, we have developed a pricing model to solve this issue, so that we can provide tighter spreads to clients even during times of higher uncertainty.
It’s important for brokers to find the most effective ways to offer the best pricing to clients. This is because the quality of the prices they provide is a key component of the overall quality of the broker, and directly impacts whether clients choose to trade with them, or with someone else.
In a market where clients are often highly sensitive to even small differences in trading fees (spreads, commissions, etc.), the ability of a broker to provide competitive spreads/commissions and accurate prices can significantly impact their market reputation, client satisfaction, and, ultimately, their success.
Therefore, brokers who find ways to provide clients with high-quality prices, as opposed to simply using a single price source or basic aggregation models, are likely to be regarded as more reliable and trustworthy, enhancing their standing in the market.
To dive into more detail about the various pricing challenges brokers face, read the next article.
This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.
Reem Bacha is a dedicated content professional and product communications specialist with over 8 years of experience in the FinTech sector.