In the last article, we introduced the idea of building robust trading systems for foreign exchange, and compared some of the characteristics of the Forex and Futures markets, with FX having its own unique, but also non-random, behaviour. This article now explores the first major challenge of actually building a system, namely, building a reliable historical database.

If we were discussing futures markets, this would be relatively straightforward, as there is only one price traded at any given time with a specific volume, which is readily available, direct from almost all of the relevant futures exchanges as well as third parties. The FX market is rather unique though.

While being by far the most liquid market in the world, it's also the most fragmented. With no central exchange, each bank makes its own price, for each currency pair. Therefore, at any given moment, EURUSD may theoretically be quoted as 1.3340/42 at one bank, 1.3339/41 at another and 1.3341/43 at a third, each with their own white labelled, or proprietary, electronic trading platform, otherwise known as an ECN (Electronic Communication Network). There are also a growing number of ECNs competing for liquidity, where 'buy side' counterparties can submit their own prices into the systems. This makes it impossible to get a truly complete, clean and accurate picture of intraday FX prices. However, even the current, fragmented, electronic market is a quantum leap forwards, from only relatively recent years.

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