While most online trading brokers offer some variant on market making or straight-through processing, some of the more high-end brokers now operate a model known as Direct Market Access, or DMA for short.
Widely considered to be the holy grail for online investors, DMA gives a trader a way of trading financial instruments electronically by interacting directly with the order book of the exchange. Traditionally, this level of access has been restricted to broker-dealers and market making firms that are members of the exchange, although most major sell-side brokers now provide DMA services to their clients alongside their traditional order methods and algorithmic trading strategies, giving their clients access to a variety of different trading strategies.
There are several advantages to using DMA as opposed to other types of order placement, namely:
- Lower transaction costs – this is made possible because only the technology is being paid for, as opposed to the usual order management and oversight that a broker provides
- More control – Because the originator of the order is the person that handles all aspects of it, this gives them a lot more control over the final execution, giving them the chance to exploit opportunities more quickly
- More privacy – with the trading taking place anonymously, using the DMA provider’s identity as cover, information leakage is minimised. DMA systems are also usually shielded from other trading desks within the organisation of the provider
- Trading the spread – the ability to enter trades directly onto the order book of an exchange, negating the need to pass through a broker or dealer, enables the trader to profit from the spread in the same way that a broker normally can
- High frequency trading – using ultra-low latency direct market access (ULLDMA) technology, traders employing automated trading strategies can make use of high-frequency trading techniques, confident that their strategies will not be undermined by slippage or re-quotes
Of course, this all comes at a price. While DMA may have many functional advantages for traders, you need to be a fairly high-end trader with a lot of capital in order to use this technology. Because you are trading directly with the order book of an exchange, there are no mini or micro-lots, and if you want to trade with leverage, you will still have to deal with a broker and find one that is willing to extend you a line of credit without all the usual safety catches that come with other order models.
So, if you are a retail trader with a few hundred or even a few thousand dollars in your trading account, then you will have to look into other trading models such as market making and straight through processing to execute your trades.