Where Does Forex Data Come From?
06 July 2022
If you are new or unfamiliar with the Forex Market, it can be daunting to ascertain the source, reliability and accuracy of forex data. That is because there is no one central exchange that can verify forex rates at any given point. The Forex Exchange Market is decentralised with multiple OTC players such as banks, trading and brokerage firms buying and selling currencies.
OTC is a process of buying and selling securities via a dealer-broker network where the counterparty is not a central exchange. Now that it's clear how a currency is bought and sold, let's look at how the prices are derived. The prices are derived predominantly from a quote-driven market. Before we go any further, let's see what a quote-driven market is.
A quote-driven market is one in which a dealer/market maker quotes a price at which they will buy and sell a security, also known as a bid and ask price. Now you may ask how a dealer may quote these rates. The dealers and brokers provide liquidity to the market by taking the opposite side of the trade, so they buy when you sell and sell when you buy. They do this by charging a spread (also known as the bid-ask spread), buying low and selling high. In modern times dealers access a pool of liquidity provided by the banks to offer the tightest bid and ask they can offer (this is a bit oversimplified). The data generated out of these quotes are the source of forex data. An FX trade is between a dealer/broker and a trader where the interdealer network (liquidity providers) provides the liquidity.
Offered Not Traded
It is likely, that most know the difference between offered and traded prices but, it's still worth mentioning. The forex data feed represents bid-ask rates, the rates the broker offers to buy and sell currencies, not necessarily the rates at which currencies trade.
Forex price can be offered by anyone, for example, your friend can set a rate to buy US dollars from you in exchange for British pounds, but this rate may not truly represent the USDGBP rate in the market. A reliable way to arrive at a USDGBP rate will be to aggregate bid-ask offers from dealers, brokers and FX specialists trading large volumes of a USDGBP (To understand the significance of the "volume", read our blog on London 4 pm Fix). That is what most quality data providers do and why relying on one individual broker data feed may not always be a good idea. A good quality forex feed is the one which has low latency data from multiple dealers and brokers as it ensures the most updated rates.
We offer an aggregated feed and don't rely on one single source for the reasons mentioned above. You can test our data set for free by simply signing up. We offer various delivery methods, including MS Excel, Google Sheets, REST API, and Websocket.