DMA stands for direct market access. DMA enables traders to place buy and sell trades directly on the order books of an exchange or a liquidity provider.
Equities, commodities, futures, foreign exchange and other tradable securities are bought and sold on an exchange, which is often referred to as an organised market. Liquidity providers are entities that hold a large quantity of a financial product. They provide financing for the security and then facilitate its trading in the direct market. Since they ‘make the market’ for the security, they are therefore often referred to as market markers. Today, traders can trade securities by placing orders directly on the order books of stock exchanges and electronic communication network brokers (ECNs) through direct market access (DMA). DMA empowers traders to become market makers rather than price takers.
Over–the-counter (OTC) dealing refers to trades that are not carried out through centralised exchanges. In an over-the-counter market, parties quote prices for financial products through a network of dealers or intermediaries. The foreign exchange market does not operate through centralised exchanges and is therefore traded via the OTC route. Electronic communication networks (ECNs) and aggregators provide foreign exchange quotes from various banks to bring together buyers and sellers. Examples include FXall, 360T and Currenex.
The direct market comprises of buy side and sell side entities. Sell side entities engage in the sale of financial instruments. These could include liquidity providers and market makers. Buy side entities engage in the buying of financial instruments. These could include asset management companies and private investors. In the foreign exchange market, orders are usually placed on the order books of ECNs. In the stock market, orders are usually placed in the central limit order book of an exchange. ECNs and exchanges bring together buy and sell side entities. Their order books comprise of the ask prices of financial products on offer by sell side participants, and the bid prices for the same by buy side participants.
Contracts for difference (CFDs) are trades between a CFD provider and a client. A CFD does not give ownership of the underlying financial instrument to the client. It is an agreement between the CFD provider and the client to settle in cash the difference between the opening and closing prices of the CFD. The CFD provider will base the price of a CFD on the price of the underlying financial instrument in the direct market. CFDs are not traded on exchanges in the organised market and are classified as OTC trades.
CFDs are traditionally quote driven. The CFD provider gives the trader a quote with an ask price based on the price of the underlying financial instrument in the direct market. These orders are then aggregated by the CFD provider and placed in the direct market for execution. CFD providers hedge their market exposure in this manner. A quote-driven CFD provider is therefore a market maker.
When a client trades a CFD using direct market access, the CFD provider instantaneously places a corresponding order in the direct market. This hedges the CFD provider’s exposure. The order placed by the CFD provider in the direct market mirrors the price, volume and instructions of the CFD. This order appears as an individual entry on the order books of the ECN or exchange.
There are several advantages to trading with direct market access. The advantages are especially tangible for active traders. DMA may also benefit investors with substantial trades. Many brokers require a minimum account size for DMA trading access.
Every financial transaction has associated costs. DMA trading entails lower costs. Direct market access is technology-driven, which eliminates manual intervention. There is no market maker, giving traders using DMA anonymity in the market. The broker acts as an agent, using technology that lowers the associated trading costs.
DMA trading systems provide both participants in the market with access to extended pricing data. Traders are often able to view data from several global exchanges and ECNs. This improves their ability to assess market liquidity.
Opening and closing auctions on exchanges are an important feature of stock trading. Liquidity becomes elevated during auctions. DMA allows traders to participate in these auctions. They may provide profitable trading opportunities, however there is also the possibility of losses occurring whilst trading auctions.
DMA can benefit traders in both the foreign exchange market as well as in the stock market. Traders place their orders directly on the order book of an exchange or ECN. This gives the trader more control over the order. It also allows for the order to be executed more quickly. No market maker intervention results in greater anonymity. This is beneficial in large financial transactions. Since there is no intermediary in the direct market, traders may place their trades within the spread on offer in the OTC market. This makes a trader more of a market maker than a price taker.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.
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