Direct market access or DMA is a method by which electronic trading transactions are purchased, sold or submitted directly in the stock exchange’s order book. Even though it seems like an obvious way to trade, DMA is a fairly recent development. Online trading also does not work exactly like DMA.
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DMA is done online, but relatively few traders have access to it and use of it. Traditionally, trading was a process that took considerable time – from the decision made to buy or sell to the trade actually falling through.
An order first has to be placed with a broker or trader, either through the phone or internet. The broker then requests a quote for the order made with a market maker, which is a firm or a person who has the stock requested and is willing to either buy or sell. The market maker then offers a bid price. The broker has to negotiate the terms including the price and make a profit out of it. All of these steps take time and the broker may can charge a brokerage fee to the end client. The quotes are compared with other market makers and it is up to the investor to make a choice. The opportunity however, lasts a short time before the bid and ask prices begin to fluctuate. With fluctuations, the spot also changes.
Called the quote-driven market, they were the standard till faster, efficient and less middlemen reliant processes were introduced. The market was dominated by trade making houses that fixed the price and small time investors were forced to be satisfied with the resulting returns.
Direct Market Access Explained
Electronic trading and moving the stock exchange online allowed the movement from quote-driven market to the order-driven system. The exchange itself has an order list that the trader can directly place the orders in with the agreeable price range. The orders remain on the list till the set criteria are met. The level of control and convenience can also be the reason why not all markets are ready to move to the DMA method. There has to be liquidity – a lot of people should want to buy and sell stock all at once, which may not always be possible.
How does DMA work?
Usually only available to institutional investors, DMA account gives you access to multiple levels of liquidity displayed in real time.
You’ll view pricing available on either side of our order book and have the ability to execute orders from the top spreads.
This allows you to gain exposure to deeper pools of liquidity with straightforward, transparent pricing from market-leading providers.
Advantages with DMA Direct Market Access
With any new technology-driven modifications, there will be a lot of positives that make the changes worthwhile; here are a few of them.
The time between placing orders and trades happening is greatly reduced, which allows the trader to make the best deal every time and make good use of short-lived opportunities.
All of the processes are electronic, online and verifiable by the participant, so errors can be cut down. As long as the person operating is careful, there will be little to no chance of errors.
In a quote-based market the trader is a price taker, with no say on the amount, but in a order-driven market, they become price makers as they make offers before accepting quotes. There are also no market makers, so there are no extra cuts to the revenues.
When the person making the trade has control over most of the buying and selling, there is a lot of opportunity for building and forming strategies as well as charting out plans detailing execution of orders.
There is no need for any representative from the broker’s side, keeping things completely anonymous. Institutions and individuals who do not want other players in the market to know what they are buying or selling will be greatly benefited with DMA.
Trades can be fixed and executed with nothing, but a trading system enabled computer. There is no need for a formal office, staff and other running costs. Lower running costs normally translate to higher revenue.
Those who do not prefer to dabble in the markets directly can have a broker authorize sale, where the decisions of an investor will go through a broker who holds the button that will either make the sale or kill the command. Popularly known as ‘one-touch DMA’, it can be used as a fail safe by those who treat the markets like a casino and take unnecessary risks.
Market regulators such as the Financial Industry Regulatory Authority (FINRA) oversee all of the market’s trading activities and have raised some concerns over the sharing or sponsored access agreements offered by sell-side firms. If a buy-side firm does not have direct market access, then it must partner with a sell-side firm, brokerage, or bank with direct market access to determine a trading price and execute the final transaction.1
FINRA’s concern stems from the potential market disruption that could occur if poorly regulated direct market access results in trading errors caused by computers or humans. The damage from these trading errors could be compounded by high-speed trading automation and high-volume trading.1 To address these trading risks, the Securities and Exchange Commission (SEC) requires firms that provide direct market access to maintain a system of risk management controls over the trading actions allowed through sponsored access
In conclusion, DMA forex is a type of trading platform that provides traders with direct access to the interbank forex market. This platform allows traders to interact directly with liquidity providers or market makers, and to see the real-time prices of currency pairs and other financial instruments. DMA forex is ideal for traders who are looking for greater transparency, control, and speed in their trading, and is becoming increasingly popular among both institutional and retail traders. If you are interested in trading forex with DMA, be sure to do your research and choose a reputable broker that offers this type of trading platform.