Direct Market Access (DMA): Intro, Trading Platforms, Brokers, and More

8 min read

By Chainika Thakar and José Carlos Gonzáles Tanaka

Direct market access is an interesting part of the trading domain which started coming in use by retail traders in the 1980s but gradually by the 1990s gained popularity amongst institutional traders. Investment banks, hedge funds etc. use direct market access mainly in today’s time.

Let us find out more about direct market access with this blog that covers:


What is direct market access?

Direct market access (DMA) is the direct access to the order books of the financial market exchanges that lead to daily transactions of securities. It is usually the firms such as investment banks (CitiGroup, J.P. Morgan), hedge funds etc. that own direct market access.


Working of direct market access

Let us assume that a trader or a firm wants to trade stocks via direct market access. First of all, a platform will be needed via a broker for availing the facility of direct access to the market.

Afterwards, the trader will place the order and the broker will do a quick check to find out the margin for opening the position in the market. After the necessary checks, the trader will be able to see other market participants’ orders and gauge the market scenario for placing the trade order.

Working of direct market access
Working of direct market access

Direct market access trading platforms

The trading platforms are provided by a broker to help the trader execute the trade orders directly with the exchange without any intermediaries. These direct access brokers must provide you with a highly specialised trading platform with some features such as:

  • Routing modules which can be programmed with a language such as Python, C, etc.
  • Algorithmic trading capabilities
  • Programmable scanners for conducting analysis such as technical analysis, fundamental analysis etc.
  • A software to place large volumes of trades in a single go (in as less time as possible)

Below you can see some of the brokers that provide direct market access service via the trading platforms:

Broker

Site link

Min. deposit

Trading platforms

Foundation year

Publicly traded

FP markets

Click here

$100

MT4, MT5, IRESS, WebTrader

2005

No

Swissquote

Click here

$1000

MT4, MT5, Advanced Trader

1996

Yes

FBS

Click here

$1

MT4, MT5, Proprietary

2009

No

VantageFX

Click here

$200

MT4, MT5, WebTrader

2009

No

IronFX

Click here

$100

MT4

2010

No

FXTM

Click here

$10

MT4, MT5

2011

No


Cost of direct market access

In order to avail the benefits of direct market access, the traders pay a minimum deposit for each broker which is mentioned above in the table. Hence, the owner of direct market access simply needs to pay an execution fee to send the trade order to the market.


Direct market access vs retail trading

Coming to the difference between direct market access and retail trading, the main difference is that retail traders use intermediaries to execute their orders. Whereas, direct market access allows a trader to directly execute the trade orders with the exchange.

Let us see some more differences between direct market access and retail trading here:

Direct market access

Non direct market access

Direct access to the market is provided by the broker

No direct access to the market is provided in case of some retail trading practices and instead, the broker remains the intermediary

Placing of trade orders is a fast process since the trader can execute the trades directly in the exchange

The speed of trade order execution depends on the broker’s technology

Payment of execution fee is made to send the trade order to the market

A commission is paid on the returns 

Direct market access may utilise ATS (Alternative Trading System) order types that pay the owner of direct market access a rebate for providing liquidity to the market

No rebates are paid

Ultra-low latency direct market access

One of the main advantages of direct market access is the low latency it offers compared to the router layer that some brokers have. Some technology vendors try to optimize this feature calling their service as ultra-low latency direct market access, implying they offer an improvement in their latency, compared to only a low latency (LL) one.

What’s the difference between low latency and ultra-low latency direct market access?

Once you read the above paragraph, you might have asked yourself this question. What we could tell you is that the industry has no clear distinction between them both.

Let us explain to you why that’s the case. ULLDMA is about handling high asset volumes with only a delay of 500 microseconds, more than that number could be understood as LL DMA. Even though this number can give you an idea, don’t get confused!

If you were trading in the 80s, ULL DMA might have meant a greater number, maybe milliseconds, nowadays 500 might be a good proxy number to differentiate between both, but in the future, with the technological improvements, you could expect that number to be reduced to zero!

What kind of trader could best take advantage of this type of service?

Low-frequency traders invest with a frequency greater than one minute. And high-frequency traders trade at a less-than-a-minute frequency. We must say that ULLDMA service could be really expensive in terms of infrastructure.

This is also because trading in such high frequency could only be profitable if you trade really high amounts of volume. So you might guess that, from a cost-benefit perspective, high-frequency traders are the ones who can potentially profit from this ultra-low latency.

How can the sell-side provide ULL DMA?

Since trading orders are digitally executed, they travel at the speed of light from the vendor’s end to the stock exchange. This speed could be potentially improved with a closer distance between the vendor’s system and the stock exchange.

You might be looking for answers to some questions such as:
How could they reduce this distance?
How close should they be with respect to the exchange?

Well, these two questions could be answered simply: Co-location is a practice, which means the vendor creates his infrastructure in the same premises where an exchange’s computer servers are housed. In that way, they guarantee the closest distance and the greatest efficiency in terms of information travel speed.


Foreign exchange direct market access

Before we talk about foreign exchange direct market access, let us explain to you the forex indirect market access.

How do foreign exchange orders work without forex direct market access?

The common service for retail traders to get access to forex markets is given by what is called a broker’s dealing desk. The broker’s dealing desk is in charge of optimizing the best route for the retail traders’ orders to reach the institutional banks.

The operation goes like this: brokers receive banking institutions' bids and ask quotes, then they aggregate the quotes to “make the market” for the retail traders. Hence, the dealing desk creates bid and ask quotes for the retail traders in such a way that these brokers allow for liquid and efficient markets.

Besides, it’s also common that the brokers act as a counterparty for retail traders. When the retail traders buy, the brokers act as a seller, and when traders sell, brokers act as their buyers, even when investors make use of leverage. This type of broker is also known as “market making” (MM) broker.

However, since more people are trading in the financial markets and more technological advances are arriving, there is an increasing number of brokers who are now providing forex direct market access to retail traders.

Working of forex direct market access

Let us find out the working of forex direct market access as well as the stock direct market access where you could access the order book from several exchanges without “a smart router”. This smart router might optimize the best route for your Tesla stock buy order.

In forex direct market access, you have access to the same banking institutions’ quotes without the intervention of the dealing desk we talked about above. So whenever you buy or sell EURUSD, for example, your order is sent directly, by the broker, to the interbank market for execution.

Then the transaction gets filled immediately. The brokers who have direct market access for traders are also called No-Dealing-Desk Brokers (NDD Brokers).

So you might be wondering:
How would I see the bid-ask quotes in No-Dealing-Desk Brokers compared to normal brokers?
Can you guess?
It’s easy!

  • In the case of a usual broker, you will see only one bid and one ask, because, as we discussed earlier, the prices of a broker are an “aggregate” from various banking institutions, provided by its dealing desk.
  • In the case of a No-Dealing-Desk Broker, you will get to see several bids and asks from these many banking institutions, so in this case, you could have plenty of bid and ask quotes to choose according to your needs!

Can you trade forex CFD derivatives with a direct market access broker?

Contract for Difference (CFD) is a type of contract which enables the investor to trade in the direction of the currency pairs instead of trading with the spot quotes. Some forex direct market access brokers could let you trade this type of derivative directly with banking institutions.

We should add that, usually, the best CFD brokers have the best reputation in the industry and tend to have professional or institutional clients. So, whenever you have doubts or issues regarding your trading experience, all these brokers have the correct knowledge to assist you in case you need it.

Also, we can say that, if you are a trader who operates with high volume levels, then you might need to operate with direct market access brokers who offer CFDs so your big orders don’t move the market. This is important while trading on big markets as in illiquid ones.

What about commission rates?

Some market making brokers only charge commissions for every transaction when trading forex, and others charge their fees on the same spread.

But, it’s usual that direct market access forex brokers charge a small mark-up on the bid-ask spread, and there won’t be any other commission fee for the orders.


Advantages of direct market access

The following are the advantages of having a direct market access (DMA):

  • All price feeds are visible and offer transparency which allows you to evaluate bid and offer volumes
  • Unlike market maker models where the broker sets the quotes, DMA models are order-driven, which makes you a price maker, not a price taker
  • Orders are executed more quickly
  • Brokers don’t access the order flow, therefore, no re-quotes and thus, DMA implies faster execution of trade orders
  • Brokers doesn’t act as a counterparty to your trades so they won’t incur in the “Principal-Agent problem
  • Small spread mark-up is charged

Disadvantages of direct market access

The disadvantages of direct market access (DMA) can be listed as follows:

  • DMA help you access the order books in the exchange, which means you can only trade instruments that have a central stock exchange
  • Very few brokers offer DMA for retail trading unless you are an experienced trader
  • If a user doesn’t trade frequently or is inactive for a long time, the broker fees could be costly
  • Prices are not always better than in non DMA brokers

Conclusion

We discussed the most relevant concepts of direct market access in the trading domain in this blog. The direct market access facility allows a trader/institution to trade in the financial market without any intermediary.

Direct market access is a faster approach that makes the owner of direct market access be in control of the entry-exit positions directly. We also discussed the different types of direct market access and the disadvantages of the same.

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Disclaimer: All investments and trading in the stock market involve risk. Any decision to place trades in the financial markets, including trading in stock or options or other financial instruments is a personal decision that should only be made after thorough research, including a personal risk and financial assessment and the engagement of professional assistance to the extent you believe necessary. The trading strategies or related information mentioned in this article is for informational purposes only.

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