The constant evolution of the capital markets has placed an added impetus upon the role technology plays in day-to-day trading operations. From the creation of advanced analytical tools to custom order entry options, the ongoing dialogue between computer software and hardware is now an important aspect of the global financial marketplace.
An Application Programming Interface (API) gives servers, software applications and operating systems the ability to connect with one another in a seamless infrastructure. Through utilising an API, individuals are able to automate trade, employ complex algorithmic systems or secure connectivity via direct market access (DMA).
Over the course of the last decade, APIs have grown in popularity among active traders and investors alike. As technology has evolved, third-party providers and a reduced cost structure have brought API capabilities to the masses.
Using a set of shared protocols, an API facilitates connectivity between operating systems, software applications and computer hardware. In the financial markets, APIs are frequently used to join three components vital to active trade:
- Software Trading Platform: In the digital environment, the software platform is the trader's portal to the marketplace. It plays a key role in the analysis of market data, order placement and position management. Trading Station, MetaTrader 4 (MT4), ZuluTrade and NinjaTrader are a few examples of software trading platforms.
- Brokerage Account: A live brokerage account is a necessity for conducting trade. The brokerage firm extends margin, places orders and ensures trades are executed at the direction of the client.
- Market/Exchange Servers: Over-the-counter (OTC) markets or standardised exchanges employ vast resources to ensure that customer orders are matched consistently and efficiently.
The vast majority of orders executed at market originate at the trader's platform and flow through brokerage resources before finally being executed on market servers. Integrating an API into this process can reduce trade-related latencies and open the door to a unique collection of features.
API: Core Features
Perhaps the most attractive element of API trading is the ability to customise how market data is received, interpreted and acted upon. Any strategy or user-defined guidelines may be integrated into trading operations via the proper coding and programming language. The following are a few areas of active trading where API technology is commonly implemented:
- Trade Automation: A completely "hands-off" approach to the markets, automated trading utilises computing power and internet connectivity to conduct everyday operations. This approach identifies opportunities, sends orders to market and automatically manages open positions in real-time.
- Market Data Analysis: One of the most attractive tools pertaining to the use of an API is the relative ease of connecting a charting package to streaming market data. Advanced charting options with proprietary tools and indicators may be integrated into the software trading platform. In addition, strategy development via backtesting and historical data analysis is also possible.
- Account Management Options: Custom queries, profitability metrics and portfolio diversification tools may be built to interpret trade-related data.
Creativity is a big part of building a useful API. While institutional traders regularly utilise their functionality for risk management or portfolio diversification, retail participants often focus their efforts upon creating front-end solutions to trade-related challenges.
With an estimated 65% of all forex trade being automated by 2019, APIs are positioned to become an indispensable aspect of the market dynamic. Streaming data, order placement and risk management are all likely to be exclusive products of API functionality.
Traditionally, strong programming skills and significant time allocations were necessary to take advantage of the benefits of APIs. However, these concerns have been largely mitigated as the popularity and technology behind API trading has grown. In fact, an overwhelming majority of online brokerage firms currently offer access to third-party options. At the end of the day, it is up to each individual whether or not API trading is a suitable avenue given all available resources.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…