Direct market access (DMA) refers to a method of electronic trading where investors can execute trades by directly interacting with an electronic order book. An order book is a list of orders that records the orders that buyers and sellers place in the stock exchange. The orders remain in the book until they are fulfilled by matching the price that a buyer wants to pay to purchase a security with the price that a seller wants to sell the security.
Usually, placing orders in the order book can only be done by brokers and financial institutions. Traditionally, if an investor wanted to place a trade, he/she would notify a broker online or over the phone. The broker would then look up the best price for investors. Using direct market access, it allows traders to bypass a broker and access the stock exchange directly. Therefore, traders can choose the price for their order(s).
Direct market access can facilitate trading for any stock exchange and any security that trades on the stock exchange. Therefore, investors can trade in equities, fixed income securities, financial derivatives, or any other financial instrument.
How are Trades Executed in Direct Market Access?
Through an online trading platform, a trader places an order to purchase a security.
The order is then recorded in an electronic trading book, and information is communicated to exchange servers.
The order is received by the stock exchange, and it can be fulfilled once the trader’s purchase price matches a seller’s price.
Who Uses Direct Market Access?
Direct market access is recommended for advanced traders only, as there may be difficulties. For example, traders gain access to advanced trading strategies – such as algorithmic trading – which is more suitable for experienced traders.
Additionally, it is also suitable for investors who are looking to place large volumes of transactions due to the requirements to execute orders with high volumes.
In addition to private traders, users also include buy-side firms, such as hedge funds, mutual funds, pension funds, and private equity funds. Buy-side firms may use the technology infrastructure provided by sell-side firms (i.e., investment banks) to get direct market access. Many sell-side firms now provide services for direct market access to their clients.
Advantages of Direct Market Access
Since there is no longer a broker involved in the trading process, the investor can get access to the market faster, which reduces transaction costs and increases the speed of which the transactions are executed.
Transactions are managed by the investor instead of a broker, so the former will exert more control over the trade order(s).
The investor gets the opportunity to take part in pre-market and post-market auctions.
There are low risks of the investor’s confidential information (i.e., name, address, bank account number) getting leaked, as there are no third-party vendors involved, and trading takes place anonymously. When trading, the investor will be using the direct market access provider’s identity, not their own.
The investor can get access to high-frequency trading, which is a type of algorithmic trading technique that utilizes high-frequency data and trading tools to produce high speed and high turnover rate.
Disadvantages of Direct Market Access
It requires the use of sophisticated technology infrastructure to get direct access to stock exchanges and enable electronic trading. Therefore, it can be costly for businesses to maintain.
If there are issues with internet connectivity, it may impact the connection to direct market access. Therefore, regular system maintenance is required to ensure proper functioning.
It is significantly regulated to ensure that trades are executed properly. It means that trading will be less flexible compared to over-the-counter methods.
If the investor’s trading account becomes inactive or if they do not trade very often, penalty fees will apply.
CFI offers the Capital Markets & Securities Analyst (CMSA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: