What is DMA and why it is a ‘must have’ in trading the markets

Direct Market Access, otherwise known as DMA quite simply ‘does’ what it says on the box; less simply, what actually is Direct Market Access ?

So, DMA gives you direct access to the market, simple enough. More importantly are the advantages that DMA gives a trader, which are often key to finding that all important edge in trading today's financial markets.

Let’s look at the simple diagram below to see the two main types of price and execution service which are on offer for those wishing to trade. DMA & Market-Making (M-M).

As you can see the key differential is that DMA gives you access to a market place where thousands of market participants compete to trade. These participants include individuals or institutions day trading, hedging, speculating, or investing. Institutions such as pension funds, insurance companies, banks. In fact most institutions need access to the financial markets in some shape or form; especially ones who derive revenue from overseas or indeed buy resources from overseas. MM by contrast is a market place with just ONE market participant - the single market-maker/dealer. And some market maker systems will have dealer intervention, which results in slower execution speeds and probably re-quotes.

The advantages:

PRICE TRANSPARENCY

An everyday comparison of the above could be the price comparison websites for insurance Vs the single insurance company. What could be better than having access to all the different prices offered by loads of insurance companies for any particular product? This gives buyers the ultimate in price transparency, producing extremely competitive prices for shoppers. The fact that these price comparison sites are abundant for not just insurance but flights, holidays, car hire, electrical products is evidence of their popularity and benefits; in fact such sites are available for practically any product you could think of, including electricity providers!

Well the same price transparency exists with DMA trading, where having access to thousands of these participants gives competitive prices and super liquidity. If the price given to you is just from one provider or market-maker how do you know it always reflects the price of the actual underlying product....and rarely can a single provider offer the same liquidity that an actual market place can, especially in volatile markets!

SPEED

With pure DMA there is no intervention by a dealer. So when your order is submitted it travels directly to the underlying exchange, without any order routing or intervention. This increases the speed of execution considerably. This is one of the main reasons City trading houses use DMA technology as low latency is crucial when dealing with volatile markets, and institutional traders need to know they can execute their orders in a fraction of a second. Also algorithmic traders, whether institutional or individual insist on DMA as their execution method, as any re-quotes or latency will inevitably produce an extra trading cost/slippage which could make a profitable system unprofitable.

DEPTH OF MARKET

With a DMA system you can view depth of market, which shows not just the best bid & offer available, but also all the orders below and above the market. This allows you to gauge liquidity on both sides of the current price and time you order entry accordingly.

Below is a screen shot showing the depth of market on the ProSpreads professional platform:

This screen shot is for the FTSE 100 and shows the orders by volume available at each ½ point above and below the price of 4805.5. This depth of market screen (often called a ‘ladder’) is the most popular way to execute orders with a DMA platform. It allows a trader to see all the orders above and below the current price and actually place any order on the ladder itself; whether it be a limit or stop order. This advanced trading functionality also gives day traders a visual representation of their position, as entry and exit levels are visible on the ladder itself.

The good news is DMA is now available to all traders; not just the pros sitting in the City trading houses, but all of us. And if those professionals are using it, then that surely speaks for itself…