Understanding the Role of APIs in Stock Market Data Analysis

5 min read • February 1, 2023

Introduction

The world of the stock market is such that you need to find as many tools as possible to gain an advantage on a particular day. One of the more popular tools is the API or Application Programming Interface.

As you can imagine, there are more than a few questions that surround this type of tool and it is wise for you to know as much as possible before trying to use it. So let’s check a guide to APIs in the stock market and what the technology is, how it works as well as its place in this field. Other things we’ll discuss are how using this tool may affect your trading experience for the better and check the obstacles you are likely to face if you go this route.

Definition of API: its importance in stock market data analysis

API stands for Application Programming Interface. It is described as a software interface or code that allows communication between multiple programs and data exchange between different systems or apps. In the context of trading and the stock market API refers to:

- A set of protocols, routines, and tools for building software or app;

- The solution that can interact with a brokerage's platform to receive market data and execute trades on behalf of the trader;

- A program that may allow traders to automate trading strategies, access market data in real-time, see historical data and execute trades based on automotive programmatic solutions.

API access is usually provided by trading or IT companies or brokerage firms in various forms, for example:

- REST API

- WebSocket API

- FIX API, and others

All sorts of data which may include commands, responses, and inquiries can be shared among different platforms. As opposed to a user interface, only programmers and programs can handle them and this makes the whole process automated.

Their specialty mainly lies in the handling of data, which they not only collect and process but share in real-time. This has made them quite popular among large tech companies and has led to a foray into the world of the stock market.

How applicable is it to data analysis in the stock market?

APIs will usually be in the hands of brokers who use them to sift through all kinds of data in readiness for use by traders. At this point, they become specialized stock market APIs and some of the key data collected and processed include:

- Real-time

- Historical data

- All prices

- Individual stock data

When this data is collected, it is in a very raw form that is difficult to read. API technology will also condense and simplify all available information, ensuring that users can view it in whatever form on a tool of their choice.

What are the advantages?

Those who use APIs in their stock market endeavors will tell you that the main benefits of using them center around the efficient way in which they handle data. For starters, the handling of complex data of all kinds be it historical or in real-time is instantaneous, which makes factoring everything in easier.

The management and deconstruction of data are also aided by the fact that there is no human factor or error. As such the data will not have to deal with any biases or emotions that may negatively impact the data provided.

A key advantage of using this technology in the stock market is the availability of backtesting. This gauges the viability of a strategy against past data to give you more of a clue as to what the results may be.

Importance in the sector

The stock market is always going to be unpredictable and finding the right trades requires a good look at all available data. This is what makes APIs so invaluable because they can do this as well as perform it in real-time and accurately.

Types of stock market APIs

Based on what your goals are, you will find that this technology has categories. You need to know that the data collected also falls into categories such as historical and real-time data as well as news and technical analysis. The following versions can handle all of the above to some degree:

Web service versions

These interfaces rely on using HTTP and as such allow data transfers via a user’s location. Data streaming on them is not ideal. However, they are popular because of their flexibility, scalability, and ease of use.

WebSocket versions

These allow data transfers through always open servers. As such, they are perfect for data streaming and quick analysis in real-time.

Library-based versions

These use libraries that allow developers to better create as they have tonnes of data to fall back on. Said data can be used in real-time after being modified into new orders or whatever is needed.

Challenges & considerations

Despite how beneficial this technology can be, it has its issues. The first of which is the fact that an API isn’t built to verify data and can only work with what it has. As such, they require some monitoring, which is a bit of a letdown when you consider that they should be automatic.

Because of this very issue, they aren’t always reliable and may require additional tools to aid them. All this adds up and can make for an expensive endeavor, which can also be a result of automating custom systems as well as using brokerages.

Final thoughts

The stock market will always need and be linked to data and this means that the dependence on tools such as APIs will only grow. Their popularity is so impressive that you have dozens of companies building or expanding their brands into the space.

As it stands, APIs are incredibly helpful, but they aren't exactly perfect and may need a few tweaks here and there to reach the next level. What that may look like is hard to tell as the stock market is affected by so many interconnected things in the general world. What is unquestionable is the fact that APIs will not lose relevance.

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