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Direct Market Access (DMA), is an electronic trading mechanism where investors can input trades directly to the central market, rather than requiring a Retail Service Provider (RSP) to act as an intermediary. Direct Market Access allows buy side firms to input trades at lower cost. It also allows trades to be placed at a faster rate, and with less chance for error from miscommunication.
When stock exchanges moved from open outcry to electronic trading, Direct Market Access became feasible. This was, in part, because of technological advancements that created electronic communication networks. Investment banks were the first to utilize electronic networks and develop Direct Market Access platforms. Direct Market Access, together with algorithmic trading, changed electronic trading and execution by altering the number and types of trades that are accessible to retail investors. Direct Market Access and algorithmic trading are also essential for… [Read More]
…high frequency trading.
Previously, private investors would need to trade though a broker. The price quoted to the investor was given from a RSP, who would offer prices in smaller volumes and higher prices. This price, while based on an exchange’s order book, was often altered. Direct Market Access, however, means investors do not need to use an intermediary. Rather, investors are able to stipulate the price they want, and the size of the order directly, and the execution venue. This is called an open-driven market.
When compared to a traditional market maker model, Direct Market Access gives more transparency, more speed, and more control. Specific advantages of Direct Market Access include:
- Equality – every order is placed equally, and you are able to see the order queue through the exchange
- Transparency and visibility – Orders are visible to all market participants. The order book reveals the number of buyers and sellers, and prices. Direct Market Access reveals unexecuted limit orders to the market, which increases transparency and helps investors determine the best price.
- Control – Investors are able to stipulate the price the order is placed at
- Auction Participation – Direct Market Access allows investors to participate in pre and post market auctions, which often results in securing lower prices
- Regulation – Direct Market Access is regulated and supervised by an exchange, increasing safety
- Tighter spreads – Direct Market Access helps spreads to become tighter, as information is displayed publicly and trades typically occur faster
Accendo Markets offers Direct Market Access trading platforms for CFDs.
As CFDs are over the counter financial instruments, they do not follow a traditional Direct Market Access model. Rather, Direct Market Access is given for the underlying instrument (whether shares, commodities, interest rates, or other). The CFD is purchased or sold to the provider at the price shown. The provider then hedges through the market place. With this method, the CFD is based on the underlying’s price and closely follows the market. Tighter spreads result in lower costs for the investors.
FX can also be traded using Direct Market Access. The FX trading platforms synthesize information from multiple banks regarding price and quantity available for trade. This information is then presented live to the investor. Once an order is placed, an external agency broker is used.