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Direct market access: What is it and what are its advantages?

What is direct market access?

Direct market access (DMA) refers to the process of executing trades directly on the order books of a financial exchange. In the past, traders couldn’t get DMA. Trade execution was carried out by brokerage firms or intermediaries on behalf of their clients, and that’s still how it works for retail traders and most individual investors, who generally cannot get DMA.

DMA, which was made possible by the rise of electronic trading from the 1990s onwards, is really the preserve of financial institutions and professional traders, who may find it easier and more efficient to trade directly on an exchange rather than through a middleman.

Read on to find out more about DMA, who uses it, how it works, and why some market participants might prefer it over other approaches.

Who gets direct market access?

Generally speaking, DMA is for large financial organisations and advanced traders. That’s because it’s risky, complex and requires sophisticated electronic trading technology and infrastructure. Many investment banks, brokerages and other sell-side firms use DMA to trade directly on major exchanges such as the New York Stock Exchange, the Nasdaq, and the London Stock Exchange.

Sell-side firms may also offer their DMA trading platforms and technology to buy-side firms such as hedge funds, pension funds, insurance companies and other financial institutions.

However, retail traders and individual investors rarely have DMA. Instead, they typically trade through a broker or intermediary.

At CMC Markets, we offer DMA only to a select group of institutional clients and professional traders. Retail traders can trade with us on financial derivative products such as spread bets and contracts for difference (CFDs). When a retail trader opens an order ticket on our platform, they select the parameters of their trade and we execute the trade on their behalf.

How does direct market access work?

As described above, DMA offers a pathway for financial institutions to place trades directly on the order books of a financial exchange where stocks, commodities and/or other financial instruments are traded.

A direct market access order is the name given to a trade placed by a trader directly on the order books of an exchange. The main advantage of this method is that it allows the trader to bypass brokerages and other intermediaries, potentially resulting in cost savings. DMA can also provide greater transparency as well as improved visibility, efficiency and pricing – factors we’ll explore in the next section.

What are the benefits of direct market access?

Cost savings: DMA allows firms to execute trades at a lower cost as it enables them to circumvent intermediaries and their fees. DMA trading may also bring cost savings to large firms that trade in bulk.
Visibility: DMA gives traders complete transparency of an exchange’s order book and all of its trade orders. Because all orders are visible, DMA traders can more easily gauge market liquidity and sentiment.
Efficiency: Order execution via DMA tends to be fast, so traders may be able to take advantage of short-term trading opportunities.
Pricing: Market prices are gathered from a wide selection of banks, exchanges and liquidity providers, giving DMA traders access to competitive prices.

FAQs

What is DMA in trading?

DMA stands for direct market access. It describes the process of trading directly on the order books of a financial exchange. Because of its complexity and the potential risks, DMA is typically available only to financial institutions and professional traders. For them, the benefits of DMA include cost savings, transparency and fast execution.

What are the costs of direct market access?

Direct market access trading usually involves lower costs than regular trading. That’s because DMA cuts out brokerages and other fee-charging intermediaries, is fully automated, and uses advanced technology to lower some of the costs associated with trading.