Direct market access (DMA) is a service in which a broker allows a client to place orders directly into the order book of an exchange or other trading venue. The client's orders travel electronically through the broker's infrastructure and reach the market under the broker's membership and identity, but no dealer at the broker handles or works them. The client decides the price, size, timing and type of every order.
Only members of an exchange can submit orders to it. DMA extends that ability to firms that are not members, chiefly asset managers, hedge funds and proprietary trading firms. It grew with electronic trading from the late 1990s and is now the usual way in which institutions that run their own trading desks or algorithms reach equity and futures markets.
How it works
The client connects its order management system or trading program to the broker, commonly through the FIX messaging protocol or an application programming interface. Each order passes through the broker's pre-trade checks and is then forwarded to the venue. Acknowledgments and fills return the same way. The client sees the venue's live prices and depth and can add, amend and cancel orders as a member could.
The broker remains the legal counterparty to the exchange and the clearing house. It is responsible for settlement of the client's trades and for any breach of exchange rules by orders sent under its name. In return it charges a commission, usually lower than for orders it works itself.
Forms of access
- Standard DMA. Orders pass through the broker's trading systems and risk controls before reaching the venue.
- Sponsored access. The client connects to the venue directly, using the broker's member ID but not the broker's order-handling systems, to save time. Risk controls are still required and are applied by the broker through separate means or at the venue.
- Algorithmic DMA. The client sends a parent order to the broker's execution algorithms, which slice it and place the pieces in the market according to an execution strategy.
European rules use the umbrella term direct electronic access for the first two. Brokers that serve speed-sensitive clients house the DMA infrastructure in the exchange's data center through colocation.
Benefits
DMA gives the client control. A trader who places a limit order directly can sit in the queue at a chosen price, earn the spread instead of paying it, and react at once to changes in the book. Orders are not seen by a sales trader, which reduces the chance that information about a large order leaks. Execution is faster than through a dealing desk, and the lower commission matters to firms that trade frequently.
For firms that run algorithmic trading strategies, direct access is a necessity, since a program must be able to manage its own orders. DMA also makes results easier to measure: the client can compare each fill with the market at the time and assess market impact and other costs.
Risks
The same directness removes a layer of human review. An order entered with the wrong price or quantity goes straight to the market, and a fat finger error or a faulty algorithm can do damage in seconds. The broker carries the financial exposure if the client cannot settle. For the market as a whole, uncontrolled access was identified as a source of systemic risk, because a single client could send orders far beyond its means under a broker's name.
The defense is a set of automated pre-trade controls within the broker's risk management system: limits on order size and value, price collars, credit and position limits, checks for duplicate orders, and a facility to block the client and cancel its orders at once.
Regulation
In the United States, the Securities and Exchange Commission adopted Rule 15c3-5, the market access rule, in 2010. It requires any broker that provides market access to maintain risk controls under its direct and exclusive control and to apply them before orders reach the market. The rule ended so-called naked access, in which clients' orders bypassed all broker checks.
In the European Union, MiFID II requires firms offering direct electronic access to assess the suitability of clients, set trading and credit thresholds, monitor activity and keep responsibility for clients' compliance with market rules. Clients that use such access to deal on their own account may themselves need authorization. In India, the securities regulator SEBI permitted DMA for institutional clients in 2008, subject to broker-level risk controls. Brokers everywhere retain best execution duties where those apply, although with DMA the client makes most execution decisions.
Retail use of the term
Some retail brokers advertise DMA accounts, particularly for shares and for the contract for difference. In the latter case the client does not own an order on the exchange. The broker places a matching hedge order in the underlying market and prices the client's contract from it. The client sees exchange depth and trades at market prices plus commission, but the legal relationship remains with the broker.