Forex: Indicative vs "real" quote data

I'm wondering if anyone out there can shed some light on, or share their experiences with using indicative vs real forex quote data when back-testing trading systems. I've been trying to gain some understanding on the different types of data and how they're collected and came to the following conclusions - if I'm completely wrong with the following, please feel free to let me know!

From my understanding, all retails brokers are in fact, mini-marketmakers between their own clients and clearing banks, only clearing trades with their clearing banks when absolutely necessary. This would basically mean that each Forex broker’s quotes (while "pretty much" following the market) are their own, and therefore different from another broker’s quotes, depending on what their clients are up to. I've verified this by downloading several demo platforms from different FOREX brokers and comparing their quotes. For instance, comparing Saxobank’s and FXDD’s hourly quotes shows normal quote differences of around 5-10 pips but can vary by as much as 50 pips! Even the guys who claim to not have Dealing Desks, still seem to make their own internal markets but often through an associated or sister company (so they can claim to not have a Dealing Desk).

My conclusion then to all this is that if you wanted to use “real” market data, rather than indicative data, you would have to get that data from the broker you happen to be using at that time, as he is the one who is “making your market” at that time. Personally, I would find it a bit risky to only use data from only one specific broker as, should he decide to change the matching conditions etc for whatever reason (for instance, a lot of brokers seem to be doing this now in response to all the news traders by widening spreads etc around news times), that “edge” that I thought I had could quite quickly disappear!

With all this in mind, I’m actually very interested to know what other automated forex trading system developers out there are using with regards to back-testing data. Up until now, I've developed my systems using indicative data ('cause it's cheap!) and then once a "profitable" system has been developed, test it using quote data from several different broker's. If it still works, then I may consider trying the system live, otherwise, it's back to the drawing board. SOoooooo.. what are you guys doing?

 

Cowil, repeated posts at http://finance.groups.yahoo.com/group/MetaTrader_Experts_and_Indicators/ speak of various problems related to MT Expert (programmed trading systems) performance both in backtesting as well as live trading and from broker to broker. One member reported his broker suggesting he change to another of the company's demo servers to overcome his backtesting problems.

Personally, thinking in terms of 'edge' has no relevance. Discussion of Expert development/performance on the MT forum in terms of edge doesn't occur, while there are several Experts that aim to trade the news — actually, betting the Consensus v Actual results — Expert performance is related more to profitability in 'all' market conditions.

As you say, "My conclusion then to all this . . . " and bear in mind that there may also be a difference between the broker's demo server data you use for testing and his live server data, which may well mean some adjustment must be made to the Expert and or Indicator/s being used for them to match testing performance.

Since auto trading Experts do Not perform profitably in 'all' market conditions, many Experts have a sometimes considerable number of rules to be applied in order to use the Expert. It seems to me that the possibly better solution is to have have 2 or more Experts one interchanges depending on market conditions, providing of course one recognizes the market condition and so applies the appropriate Expert.

 

Hi Wallace,

Thanks for your comments. I have got my system tweaked for different market conditions etc but it's getting a reliable quote source that's been the difficult bit. With pretty much any other financial instrument, there's a centralised exchange involved - thus you're able to obtain definitive quotes. For forex helaas, this can be a bit of a problem...

 

Someone sent me a white paper touting the merits of ECN data... specifically, hotspot was mentioned for their quality feed. esignal offer hotspot's feed for a small premium to their GTIS service.

 

Hi Riskarb,

Thanks for your reponse. I had a look on their site but unfortunately, Hotpsot themselves don't appear to supply historical data - only current data feeds. However, after a bit more searching, it appears that Tenfore supply Hotspot's historical tick data which may be worth looking into...