What is Direct Market Access (DMA)?

What is Direct Market Access (DMA)?
by Olivier Becquet

Direct market access describes a trading pattern which involves, a trade been placed online by you, and then your order is forwarded directly to the stock exchange for execution. You may be amazed to find out that this is not how online trading always works, but as a matter of fact DMA has only been made available for retail investors for a short period of time. In most markets, a large number of brokers don’t make use of it.

In the ancient way of placing a trade, you send an order to your broker by making use of a telephone and a then requests a quote from the market maker for that order. A market maker is a firm that is always ready to buy Or sell a stock: Its quote displays both a bid price and an offer price at all points in time and an aim to make profits from the difference between both of them. This difference is called the bid/offer spread or the bid/ask spread.

Brokers usually poll different markets makers and make the best quote available to you. That quote is then valid for a certain period of time, let’s say 10 seconds after which it becomes expired.

This is referred to as a quote-driven market. You are presented with a quote and it’s your decision on whether to accept it or not. From the onset, all markets performed like this, with the price you receive from any stock eventually coming down to what the market makers were prepared to give. But technology made a difference and even small investors can now observe the difference.

How order-driven markets let you trade directly

With the emergence of totally electronic trading in the 1990s, a new form of the market came up, it was called an order driven market. With this system, the exchange had an electronic order book in which participants place the amount they can afford and the price they are willing to buy and sell. Those orders remain on the book until they are accepted or declined.

If a certain trader places an order to purchase and another to sell at the same rate, then the order book will match both of them and trade will take place automatically. But, if someone decides to place an order to purchase or sell at the given market price – rather than been specific about a fixed price – they will be eventually matched with the best price currently in the order book.

Not all existing markets have switched to this method. It only functions where there is a sufficient amount of liquidity. If you send in a limit order to be executed and the shares exceed a certain price range, it goes straight into their system and is affected by then via a market maker if the limit price is attained.

The advantages of DMA

Nevertheless, if your broker gives direct market access, your order goes straight into the exchange order book. This entails that there is a subtle change in your affinity with the market – you move from accepting a quote to making an offer. You are now called a price maker rather than be referred to a price taker.

DMA has numerous advantages over using market makers. These include:

  1. Orders should be effected spontaneously since they don’t have to go through an intermediary.
  2. Trading should be executed at a slightly cheaper price because the market maker does not need to take their share.
  3. There are lesser chances for human error, with someone at your broker or marker maker committing an error.
  4. Precise trading strategies can utilize DMA, preferably by giving the trader an upper hand over how his order is affected.
  5. For the fact that no broker representative is involved in placing the trade, direct market access proffers more obscurity – often charming to institutional traders who would prefer no one to know what they are purchasing or selling.
  6. Brokers usually have lower overheads, since all they do is to allow you to place trades via their computer, which makes it possible to request lower fees.

Those who bother about receiving the most out of these benefits make a decision between the real  DMA and one-touch DMA. With the aid of true DMA, orders go directly to the exchange without any human influence – just a few automatic checks by the broker’s computer system. With the aid of one-touch DMA, a person at the broker has to push a button to enable your order to be moved to the exchange.

Notably, one-touch DMA can lose its pace and anonymity benefits of direct market access. But in some nations, regulators don’t allow true DMA- they may feel that a human has to access that the trader’s bank account has enough funds or financial securities to cover the order.

They may also add other restrictions, which includes requesting the order to be followed by a special trading ID which entails that the order is not anonymous on the order book. These restrictions are mostly direct to foreign investors and are frequent in a number of Asian markets such as Taiwan and South Korea.

DMA for retail investors

Most of these issues are of lesser concern to an average retail investor. Nevertheless, direct market access may get you a slightly cheaper price than what is available via a market maker and permits you to manage your orders a little bit better. The coming together of lower costs and higher volume also assisted to beat down broker commissions in some markets e.g. the US.

If you are not an active trader, your savings are going to be small. I would not pick a broker just because he offers DMA. But it is always amazing to see firms bringing out DMA because this should probably add to the steadily declining falling in brokerage price and quicker services.

For the fact that a firm permits you to trade online do not automatically mean that it gives direct market access. At a lot of multimarket online brokers, your order does not go straight into the exchange but it is moved on to a market maker, which could be a different part of the same company or it could be a third party.

In a few instances, your broker will opt for a local broker in the market you desire to trade in, who will be responsible for placing your order with the market maker. Basically, the more links in a change like this, the higher the possibility of trading costs.

So which of the brokers taking care of retail investors offers DMA as a section of their trading services?  In the united states, there are providers who offer it for American exchanges. There are fewer in Europe, but you can find a few brokers who can affect it for major markets.

Understanding DMA CFDs

In addition to this, different firms in the UK and Singapore are now giving out DMA Contracts For Difference (CFDs). This is a bit confusing because it does not entail that you trade CFDs through DMA.

As a matter of fact, in most nations, CFDs are mostly an over the counter product and resulting in no market for no straight up access to. Australia is an exception because CFDs are listed.

Instead, it entails that you envisage a direct market access screen for the important shares, but when trading you don’t always purchase or sell shared. Rather, you opt into a CFD with the provider at the price displayed, in which the provider can then hedge by making a cash order straight into the order book on its behalf.

This is a useful development for traders since it means the CFD price is based on the underlying market price for a share rather than one quoted by the provider. This usually comes with slightly higher trading fees than non-DMA CFD trading services, but the tighter spreads should mean lower overall costs for very active traders.

This is a beneficial development for marketers since it entails that the CFD amount is based on the elementary market price for a share other than the one presented by the provider. This is usually associated with a higher trading cost than DMA CFD trading services, but the clumsy spreads should mean lower entire cost for very busy traders.

Nevertheless, this is just a trading product. Investors should be conscious of the difference between a company offering direct market cash for the purpose of cash investment in shares and DMA CFDs and not just inconclusively presume that just because a company offers DMA CFDs that it also offers DMA for purchasing the elementary.