APIs today exist almost everywhere and most people don’t even realize they are using them. Their use have become so popular especially with the current rise of automated trading systems.
What is an API?
API stands for Application Programming Interface and it is a program that enables one software to interact with the other. The API is a messenger taking requests and telling a system what the user wants it to do then returns the response back to the user.
How is API used in trading?
The trading API like the name suggests enables you to interact with the trading system. To be more specific, it allows you to implement directly on the exchange. This is useful to the traders who run algorithmic models on their trading systems and want to be able to execute trades and receive live or real time pricing manually or automatically through the algorithm when their model initiates a trading signal.
Before the advent of API trading, traders had to screen for opportunities in one application and place trades separately with the broker. Most of the retail brokers today use APIs enabling traders to connect their screening software direct with the brokerage account sharing real-time prices and also placing orders.
Today, there are two types of traders using broker APIs:
- Third party apps. Most of the traders use third party apps that need access to the broker APIs for the ability to place trades as well as real time price data.
- Developer apps. A good number of traders today develop their own automated trading systems using programming languages such as Python and need a way to place trades and access pricing data.
APIs have significant advantages but there are also risks to consider. Most of the APIs are provided to the broker’s customers for free but there are some instances where traders incur an extra fee to get the API. It is paramount that the customers understand the fees involved before they start using the API. Also remember APIs have their own limitations that include potential for downtime which could significantly impact the trading results.
There are incidences that have happened and put APIs under bad light but they are still important trading items in a professional trader’s arsenal.