What is market data?

Learn about different types of market data, what is a market maker, and how market forces impact traders with Capital.com

What is market data?

Market data includes real-time and historical information – such as asset prices – that measure the activity of assets like stocks, commodities, currency pairs and indices.

Traders often study market data to gain valuable insights about the performance of various assets, understand market movements and anticipate future activity. 

How does market data work?

Market data is typically provided by financial exchanges, brokers, and financial data vendors. Trading platforms use market data to deliver precise and timely updates about asset performance. 

This data often includes:

• Asset price data – real-time and historical asset price data, providing insights into market trends and movements.

• Asset volume data – amount of an asset (or CFD) traded in a specific period of time, offering a view of market liquidity and activity.

• News and market events – reports and events that have the potential to shift market sentiment and asset prices.

• Economic indicators – key figures such as GDP growth, unemployment rates and inflation figures that may influence broader market conditions and economic policy.

In technical analysis, traders examine market data for trends and chart patterns. They often use technical indicators, such as MACD or RSI, to confirm the trading signals before making a decision.

What are the different types of market data?

Market data is a broad concept, encompassing a vast amount of information recorded directly by exchanges and brokers. Here are some common terms used to describe market data:

• Real-time market data provides instant updates on asset prices and trading activity. It’s essential for day traders and scalpers especially.

• Delayed market data is usually delayed by 15-20 minutes and often available for free. It’s suitable for longer term strategies that don’t require real-time data.

• Historical market data consists of past asset prices and trading volumes, and is essential for technical analysis, identifying chart patterns and backtesting strategies.

• Reference data offers background information on financial assets such as stock codes, dividend schedules and corporate actions.

You can further distinguish between market data based on the breadth of information available, which can depend on each trader’s requirements. According to market microstructure theory, there are three levels of information that a market may provide – level 1, level 2 and level 3.

Level 1 market data is referred to as ‘top of book’ data. It only provides basic information about assets, such as the best and most recent buy/sell prices and trading volume – and doesn’t include historical data. It’s often favoured by long-term traders who may not need granular or intraday data.

Level 2 market data is often called ‘depth of book’ data. It provides a more transparent view of asset performance, including the five-to-ten best current bid and ask prices and the order volume for each price. Typically used in short or medium term strategies such as day trading, scalp trading and algorithmic trading.

Level 3 market data provides access to details about all orders available in the order book, with detailed real-time insights about individual traders’ actions, such as who is placing, cancelling or modifying orders. This level of information is exclusive to market makers, brokers, analysts and institutional traders, and it's not available to retail traders.

How do market forces impact traders?

Market forces are the fundamental factors that influence the price and availability of assets in trading, primarily driven by supply and demand dynamics. Supply refers to the total amount of a specific asset available in the market, while demand represents traders’ willingness and capacity to buy that asset.

Supply and demand may be affected by various factors, including:

• Economic indicators – data such as inflation and interest rates, unemployment figures and GDP growth that influence market supply and demand.

• Trader sentiment – the collective mood of traders, often influenced by news, market conditions and economic reports.

• Political stability – geopolitical events that affect confidence in markets and may influence trader behaviours.

What is market efficiency?

Market efficiency refers to the extent to which asset prices reflect all available information. It assumes that traders act rationally, meaning market prices should consistently represent the true underlying value of assets based on the information at hand.

Efficient market hypothesis (EMH)

The efficient market hypothesis (EMH) is a theory of market efficiency, asserting that asset prices fully reflect all available information. EMH posits that financial markets are informationally efficient, and that it’s impossible to consistently outperform the market through technical or fundamental analysis.

While EMH is widely debated, it provides a framework for understanding market behaviour and the role of information in price setting. It’s categorised into three forms based on the breadth of information considered:

• Weak form EMH suggests that all historical price and volume data is already reflected in asset prices. So technical analysis, which relies on past data, is considered inadequate for predicting future market movements.

• Semi-strong form EMH asserts that all publicly available information – like financial statements and news – is incorporated into market prices quickly. Therefore, neither technical nor fundamental analysis should enable consistent outperformance of the market.

• Strong form EMH claims that all information, both public and private (insider) information, is fully reflected in market prices. Hence, even traders with insider knowledge cannot consistently achieve higher returns.

What is a market maker?

Market makers provide liquidity by consistently buying and selling assets at publicly quoted prices. They allow the market to function smoothly by ensuring that there’s always a counterparty for a trade, and earn a profit from the buy-sell spread. This process guarantees that traders can enter and exit positions easily without significant price slippage.

Sometimes, exchanges designate a lead market maker for specific assets, responsible for maintaining liquidity and ensuring that the market remains orderly even during volatile periods. Market makers can include firms such as investment banks, as well as institutional traders.

Financial regulators oversee the activities of market makers to prevent market abuse and manipulation. For instance, the SEC (Securities and Exchange Commission) regulates market makers in the United States, and in the UK, oversight is provided by the FCA (Financial Conduct Authority)

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