Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

DMA trading

DMA stands for direct market access. DMA trading enables traders to place buy and sell trades directly on the order books of an exchange or a liquidity provider.

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.

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Direct market access vs market maker

Equities, commodities, futures, foreign exchange and other tradable securities within the financial markets 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 trading). DMA empowers traders to become market makers rather than price takers.

How to get direct market access

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 share market, orders for DMA share trading 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 over-the-counter 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 contract for difference using DMA CFD trading, the provider instantaneously places a corresponding order in the direct market. This hedges the CFD provider’s exposure. The order placed by the 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.

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Direct market access vs algorithmic trading

DMA trading platforms can often be used with algorithmic trading strategies, as they are useful for both and sell traders. Algorithmic trading helps to quicken the trading process and achieve best execution for each position. This can also help the trader to save money as automated trading systems are generally more efficient and present less risks. The meaning of direct market access with algorithmic trading also helps to take advantage of order execution and fast transactions that traders may not have time to spot themselves.

Advantages of DMA trading

  • 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 direct market access 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 direct market access 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.

Direct market access trading platform

Direct market access platforms often come in the form of brokers. DMA trading platforms aim to combine quick algorithmic strategies with efficient order execution to achieve the best results, but some can also focus more on fundamental analysis and funcionality of the platform. A DMA trading platform is also very useful for block trades​, as direct market access software is prepared to place large volumes of trades in one go, with a speedy execution and results.

Disclaimer: 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. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.