As financial markets moved on from traditional open outcry trading on exchange trading floors towards decentralised electronic, screen-based trading and information technology improved, the opportunity for investors and other buy side traders to trade for themselves rather than handing orders over to brokers for execution began to emerge. The implementation of the FIX protocol gave market participants the ability to route orders electronically to execution desks. Advances in the technology enabled more detailed instructions to be submitted electronically with the underlying order. The logical conclusion to this, enabling investors to work their own orders directly on the order book without recourse to market makers, was first facilitated by electronic communication networks such as Instinet. Recognising the threat to their own businesses, investment banks began acquiring these companies and developing their own DMA technologies. Most major sell-side brokers now provide DMA services to their clients alongside their traditional 'worked' orders and algorithmic trading solutions giving access to many different trading strategies.
Benefits
There are several motivations for why a trader may choose to use DMA rather than alternative forms of order placement:
DMA usually offers lower transaction costs because only the technology is being paid for and not the usual order management and oversight responsibilities that come with an order passed to a broker for execution.
Orders are handled directly by the originator giving them more control over the final execution and the ability to exploit liquidity and price opportunities more quickly.
Information leakage is minimised because the trading is done anonymously using the DMA provider's identity as a cover. DMA systems are also generally shielded from other trading desks within the provider's organisation by a Chinese wall.
Direct market access allows a user to 'Trade the Spread' of a stock. This is facilitated by the permission of entering your order onto the 'Level 2' order book, effectively negating the need to pass through a broker or dealer.
Advanced trading platforms and market gateways are essential to the practice of high-frequency trading. Order flow can be routed directly to the line handler where it undergoes a strict set of Risk Filters before hitting the execution venue. Typically, ULLDMA systems built specifically for HFT can currently handle high amounts of volume and incur no delay greater than 500 microseconds. One area in which low-latency systems can contribute to best execution is with functionality such as direct strategy access and Smart Order Router.
Foreign exchange direct market access refers to electronic facilities that match foreign exchange orders from individual investors and buy-side firms with bank market maker prices. FX DMA infrastructures, provided by independent FX agency desks, consist of a front-end, API or FIX trading interfaces that disseminate price and available quantity data from multiple bank contributors and enables buy-side traders, both institutions in the interbank market and individuals trading retail forex in a low latency environment. Other defining criteria of FX DMA:
Trades are matched solely on a price/time protocol. There are no re-quotes.
Platforms display the full range of one-tenth pip or percentage in point consistent with professional FX market quotation protocols not half-pip pricing.
Anonymous platforms ensure neutral prices reflecting global FX market conditions, not a dealer’s knowledge or familiarity with a client’s trading methods, strategies, tactics or current position.
Enhanced control of trade execution by providing live, executable price and quantity data enabling a trader to see exactly at what price they can trade for the full amount of a transaction.
Orders are facilitated by agency brokers. The broker is not a market maker or liquidity destination on the DMA platform it provides to clients.
Market structures show variable spreads related to interbank market conditions, including volatility, pending or recently released news, as well as market maker trading flows. By definition, FX DMA market structures cannot show fixed spreads, which are indicative of dealer platforms.
Fees are either a fixed markup into the client’s dealing price and/or a commission.
