Data has always been an essential driver of trading, and traders have long made efforts to gain an advantage from access to superior information. These efforts date back at least to the rumors that the House of Rothschild benefited handsomely from bond purchases upon advance news about the British victory at Waterloo carried by pigeons across the channel.
Today, investments in faster data access take the shape of the Go West consortium of leading high-frequency trading (HFT) firms that connects the Chicago Mercantile Exchange (CME) with Tokyo. The round-trip latency between the CME and the BATS exchanges in New York has dropped to close to the theoretical limit of eight milliseconds as traders compete to exploit arbitrage opportunities. At the same time, regulators and exchanges have started to introduce speed bumps that slow down trading to limit the adverse effects on competition of uneven access to information.
Traditionally, investors mostly relied on publicly available market and fundamental data. Efforts to create or acquire private datasets, for example through proprietary surveys, were limited. Conventional strategies focus on equity fundamentals and build financial models on reported financials, possibly combined with industry or macro data to project earnings per share and stock prices. Alternatively, they leverage technical analysis to extract signals from market data using indicators computed from price and volume information.
Machine learning (ML) algorithms promise to exploit market and fundamental data more efficiently than human-defined rules and heuristics, in particular when combined with alternative data, the topic of the next chapter. We will illustrate how to apply ML algorithms ranging from linear models to recurrent neural networks (RNNs) to market and fundamental data and generate tradeable signals.
This chapter introduces market and fundamental data sources and explains how they reflect the environment in which they are created. The details of the trading environment matter not only for the proper interpretation of market data but also for the design and execution of your strategy and the implementation of realistic backtesting simulations. We also illustrate how to access and work with trading and financial statement data from various sources using Python.
Market data is the product of how traders place orders for a financial instrument directly or through intermediaries on one of the numerous marketplaces and how they are processed and how prices are set by matching demand and supply. As a result, the data reflects the institutional environment of trading venues, including the rules and regulations that govern orders, trade execution, and price formation. See Harris (2003) for a global overview and Jones (2018) for details on the US market.
Algorithmic traders use algorithms, including ML, to analyze the flow of buy and sell orders and the resulting volume and price statistics to extract trade signals that capture insights into, for example, demand-supply dynamics or the behavior of certain market participants. This section reviews institutional features that impact the simulation of a trading strategy during a backtest before we start working with actual tick data created by one such environment, namely the NASDAQ.
Market microstructure studies how the institutional environment affects the trading process and shapes outcomes like the price discovery, bid-ask spreads and quotes, intraday trading behavior, and transaction costs. It is one of the fastest-growing fields of financial research, propelled by the rapid development of algorithmic and electronic trading.
Today, hedge funds sponsor in-house analysts to track the rapidly evolving, complex details and ensure execution at the best possible market prices and design strategies that exploit market frictions. This section provides a brief overview of key concepts, namely different market places and order types, before we dive into the data generated by trading.
Two categories of market data cover the thousands of companies listed on US exchanges that are traded under Reg NMS: The consolidated feed combines trade and quote data from each trading venue, whereas each individual exchange offers proprietary products with additional activity information for that particular venue.
In this section, we will first present proprietary order flow data provided by the NASDAQ that represents the actual stream of orders, trades, and resulting prices as they occur on a tick-by-tick basis. Then, we demonstrate how to regularize this continuous stream of data that arrives at irregular intervals into bars of a fixed duration. Finally, we introduce AlgoSeek’s equity minute bar data that contains consolidated trade and quote information. In each case, we illustrate how to work with the data using Python so you can leverage these sources for your trading strategy.
The primary source of market data is the order book, which updates in real-time throughout the day to reflect all trading activity. Exchanges typically offer this data as a real-time service for a fee but may provide some historical data for free.
In the United States, stock markets provide quotes in three tiers, namely Level I, II and III that offer increasingly granular information and capabilities: - Level I: real-time bid- and ask-price information, as available from numerous online sources - Level II: adds information about bid and ask prices by specific market makers as well as size and time of recent transactions for better insights into the liquidity of a given equity. - Level III: adds the ability to enter or change quotes, execute orders, and confirm trades and is only available to market makers and exchange member firms. Access to Level III quotes permits registered brokers to meet best execution requirements.
The trading activity is reflected in numerous messages about orders sent by market participants. These messages typically conform to the electronic Financial Information eXchange (FIX) communications protocol for real-time exchange of securities transactions and market data or a native exchange protocol.
The trading activity is reflected in numerous messages about trade orders sent by market participants. These messages typically conform to the electronic Financial Information eXchange (FIX) communications protocol for real-time exchange of securities transactions and market data or a native exchange protocol.
While FIX has a dominant large market share, exchanges also offer native protocols. The Nasdaq offers a TotalView ITCH direct data-feed protocol that allows subscribers to track individual orders for equity instruments from placement to execution or cancellation.
AlgoSeek provides historical intraday data at the quality previously available only to institutional investors. The AlgoSeek Equity bars provide a very detailed intraday quote and trade data in a user-friendly format aimed at making it easy to design and backtest intraday ML-driven strategies. As we will see, the data includes not only OHLCV information but also information on the bid-ask spread and the number of ticks with up and down price moves, among others. AlgoSeek has been so kind as to provide samples of minute bar data for the NASDAQ 100 stocks from 2013-2017 for demonstration purposes and will make a subset of this data available to readers of this book.
AlgoSeek minute bars are based on data provided by the Securities Information Processor (SIP) that manages the consolidated feed mentioned at the beginning of this section. You can find the documentation at https://www.algoseek.com/samples/.
Quote and trade data fields The minute bar data contain up to 54 fields. There are eight fields for the open, high, low, and close elements of the bar, namely: - The timestamp for the bar and the corresponding trade - The price and the size for the prevailing bid-ask quote and the relevant trade
There are also 14 data points with volume information for the bar period: - The number of shares and corresponding trades - The trade volumes at or below the bid, between the bid quote and the midpoint, at the midpoint, between the midpoint and the ask quote, and at or above the ask, as well as for crosses - The number of shares traded with up- or downticks, i.e., when the price rose or fell, as well as when the price did not change, differentiated by the previous direction of price movement
The directory algoseek_intraday contains instructions on how to download sample data from AlgoSeek.
There are several options to access market data via API using Python. In this chapter, we first present a few sources built into the
pandas library. Then we briefly introduce the trading platform Quantopian, the data provider Quandl (acquired by NASDAQ in 12/2018) and the backtesting library
zipline that we will use later in the book, and list several additional options to access various types of market data. The directory data_providers contains several notebooks that illustrate the usage of these options.
The folder data providers contains examples to use various data providers. 1. Remote data access using pandas DataReader 2. Downloading market and fundamental data with yfinance 3. Parsing Limit Order Tick Data from LOBSTER 4. Quandl API Demo 5. Zipline data access
Fundamental data pertains to the economic drivers that determine the value of securities. The nature of the data depends on the asset class: - For equities and corporate credit, it includes corporate financials as well as industry and economy-wide data. - For government bonds, it includes international macro-data and foreign exchange. - For commodities, it includes asset-specific supply-and-demand determinants, such as weather data for crops.
We will focus on equity fundamentals for the US, where data is easier to access. There are some 13,000+ public companies worldwide that generate 2 million pages of annual reports and 30,000+ hours of earnings calls. In algorithmic trading, fundamental data and features engineered from this data may be used to derive trading signals directly, for example as value indicators, and are an essential input for predictive models, including machine learning models.
The Securities and Exchange Commission (SEC) requires US issuers, that is, listed companies and securities, including mutual funds to file three quarterly financial statements (Form 10-Q) and one annual report (Form 10-K), in addition to various other regulatory filing requirements.
Since the early 1990s, the SEC made these filings available through its Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. They constitute the primary data source for the fundamental analysis of equity and other securities, such as corporate credit, where the value depends on the business prospects and financial health of the issuer.
Automated analysis of regulatory filings has become much easier since the SEC introduced XBRL, a free, open, and global standard for the electronic representation and exchange of business reports. XBRL is based on XML; it relies on taxonomies that define the meaning of the elements of a report and map to tags that highlight the corresponding information in the electronic version of the report. One such taxonomy represents the US Generally Accepted Accounting Principles (GAAP).
The SEC introduced voluntary XBRL filings in 2005 in response to accounting scandals before requiring this format for all filers since 2009 and continues to expand the mandatory coverage to other regulatory filings. The SEC maintains a website that lists the current taxonomies that shape the content of different filings and can be used to extract specific items.
There are several avenues to track and access fundamental data reported to the SEC: - As part of the EDGAR Public Dissemination Service (PDS), electronic feeds of accepted filings are available for a fee. - The SEC updates RSS feeds every 10 minutes, which list structured disclosure submissions. - There are public index files for the retrieval of all filings through FTP for automated processing. - The financial statement (and notes) datasets contain parsed XBRL data from all financial statements and the accompanying notes.
The SEC also publishes log files containing the internet search traffic for EDGAR filings through SEC.gov, albeit with a six-month delay.
The scope of the data in the Financial Statement and Notes datasets consists of numeric data extracted from the primary financial statements (Balance sheet, income statement, cash flows, changes in equity, and comprehensive income) and footnotes on those statements. The data is available as early as 2009.
The folder 03_sec_edgar contains the notebook edgar_xbrl to download and parse EDGAR data in XBRL format, and create fundamental metrics like the P/E ratio by combining financial statement and price data.
We'll be using many different data sets in this book, and it's worth comparing the main formats for efficiency and performance. In particular, we compare the following:
The notebook storage_benchmark in the directory 04_storage_benchmark compares the performance of the preceding libraries.