Originally published by OpenMarkets
Fintech. Innovation. Words that are often used in the same sentence, often by yours truly. Each time I delve into a new part of the fintech landscape, I can’t help but marvel at the changes to this industry which, not all that long ago, was driven by pen and paper. Many of the innovations I have written about over the past year or so – robo advice, social investing, the round-up app Acorns – all have one thing in common. APIs. If you have ever marvelled at a fax machine (just how does that page I send here get replicated there?) then APIs will really blow you away.
What is an API?
Starting with the basics, an API – or Application Program Interface – is a set of clearly defined methods of communication between various software components. That might not mean much to you (didn’t mean a lot to me) so let me borrow a definition and analogy from this YouTube clip– it’s the simplest explanation I’ve been able to find.
“The API is the messenger that takes requests and tells the system what you want to do…and then returns the response back to you”
Picture yourself in a cafe. The waiter takes your order to the kitchen, tells the ‘system’ what to do…then brings the completed order back to you. The waiter is a human API, the conduit or messenger, that tells systems what to do, and then returns the relevant information – or lunch!
In trading terms, an API is an interface that allows one software program to work with, or talk to, another; it enables an investor’s or business’s software to interface with a platform that then connects with the market, executes a trade and returns real-time information. Trading APIs have multiple features that facilitate information sharing, including real-time information, trade execution, and confirmations.
Traders seeking APIs for personal algos
What does every trader want? Orders in real time. When do they want it? Now! That is, information in real time!
APIs enable a trader to write their own software programs or computer algorithms; it may be based on varied parameters, such as a research methodology, market depth, volume or price. This software ranges from the extremely complex through to simple algorithms using an Excel spreadsheet.
This individual program integrates with platforms via an open API. When the software is triggered – a price reaches a new low, trading volume in a specific stock increases or decreases, a prime ratio hits a specific target – orders are automatically fired off in real time. The order is executed, and the investor receives confirmation. Depending on stock availability, this can happen in seconds.
Apparently, it’s not rocket science – if you can write code, you can plug into an API and set your own investment parameters. Ten years ago, you needed to be a big investment bank for this level of personalised trading; now a home trader can write their own systems and connect to the market via an API.
“What if something goes horribly wrong?” I hear you ask.
Never fear, there is a test environment that allows the trader to test ideas in the ASX test market. If it doesn’t give you the right results, rebuild and test again. Once you’re confident that the software works to your specifications, you can move into production in the real market.
Financial services trading via APIs
Allowing API connectivity to its trading platform allowed several fintechs to get up and running quite inexpensively; using APIs, they were able to maintain control of the user experience while providing real time market trading.
It enables creativity and allows companies to put their energies into building interactive websites, tools and creative client experiences. It presents the opportunity for those businesses to innovate and differentiate from their competitors.
If using traditional broking platforms, the user experience is generally controlled by the platform provider, many of which are competing for a share of that investor’s wallet. Think of a broking platform provided by a big four bank – they want the client’s eyeballs on mortgage rates and ETFs and term deposits and anything else they can cross sell.
The future of APIs
This is the world of API 1.0 – where can it go from here? Well, anywhere! Increased market demand will result in growth and development. Already there’s growth in inbound API trading where big volume day traders based anywhere in the world utilise FIX APIs and, using a proprietary front end (such as one focused on day trading the Australian market).
Once people start to get creative, the potential for new product development is enormous. When the technology, and its possibilities, is better understood, we’ll see a plethora of new products and services emerge. It’s one of those things that is sometimes difficult to see from the starting blocks, but once API 2.0 is here, we’ll be living (and trading) in a truly connected and integrated world.