Direct Market Access
Encyclopedia
Direct market access is a term used in financial markets to describe electronic trading
facilities that give investor
s wishing to trade
in financial instruments
a way to interact with the order book
of an exchange
. Normally, trading on the order book is restricted to broker-dealers and market making
firms that are members of the exchange. Using DMA, investment companies
(also known as buy side
firms) and other private traders
utilise the information technology
infrastructure of sell side
firms such as investment banks
and the market access that those firms have, but control the way a trading transaction is managed themselves rather than passing the order over to the broker's own in-house traders for execution. Today, DMA is often combined with algorithmic trading
giving access to many different trading strategies
.
trading on exchange
trading floors towards decentralised electronic, screen-based trading
and information technology improved, the opportunity for investor
s 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 maker
s, was first facilitated by electronic communication network
s such as Instinet
. Recognising the threat to their own businesses, investment banks
began acquiring these companies (e.g. the purchase of Instinet in 2007 by Nomura Holdings
) 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
.
. Order flow can be routed directly to the line handler where it undergoes a strict set of Risk Filters before hitting the execution venue(s). The race for ultra-low latency direct market access is a hot topic amongst high frequency traders, Brokers and technology vendors such as Ullink
or Fidessa
. 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 (DSA) and Smart Order Router.
and individuals trading retail forex, to trade in a transparent, low latency
environment.
Other defining criteria of FX DMA:
Algorithmic Trading and DMA: An introduction to direct access trading strategies, Barry Johnson, 4Myeloma Press, February 2010.
Electronic trading
Electronic trading, sometimes called etrading, is a method of trading securities , foreign exchange or financial derivatives electronically...
facilities that give investor
Investor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...
s wishing to trade
Trade (financial instrument)
In finance, a trade is an exchange of a security for "cash", typically a short-dated promise to pay in the currency of the country where the 'exchange' is located...
in financial instruments
Financial instruments
A financial instrument is a tradable asset of any kind, either cash; evidence of an ownership interest in an entity; or a contractual right to receive, or deliver, cash or another financial instrument....
a way to interact with the order book
Order book (trading)
An order book is the list of orders that a trading venue uses to record the interest of buyers and sellers in a particular financial instrument. A trading engine uses the book to determine which orders can be fulfilled i.e...
of an exchange
Exchange (organized market)
An exchange is a highly organized market where tradable securities, commodities, foreign exchange, futures, and options contracts are sold and bought.-Description:...
. Normally, trading on the order book is restricted to broker-dealers and market making
Market maker
A market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn. From a market microstructure theory standpoint, market makers are net sellers of an option to be...
firms that are members of the exchange. Using DMA, investment companies
Investment company
An investment company is a company whose main business is holding securities of other companies purely for investment purposes. The investment company invests money on behalf of its shareholders who in turn share in the profits and losses....
(also known as buy side
Buy side
Buy-side is a term used in investment banking to refer to advising institutions concerned with buying, rather than selling, assets or securities...
firms) and other private traders
Trader (finance)
A trader is someone in finance who buys and sells financial instruments such as stocks, bonds, commodities and derivatives. A broker who simply fills buy or sell orders is not a trader, as they are merely executing instructions given to them. According to the Wall Street Journal in 2004, a managing...
utilise the information technology
Information technology
Information technology is the acquisition, processing, storage and dissemination of vocal, pictorial, textual and numerical information by a microelectronics-based combination of computing and telecommunications...
infrastructure of sell side
Sell side
Sell side is a term used in the financial services industry. It is a general term that indicates a firm that sells investment services to asset management firms, typically referred to as the buy side, or corporate entities...
firms such as investment banks
Investment banking
An investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities...
and the market access that those firms have, but control the way a trading transaction is managed themselves rather than passing the order over to the broker's own in-house traders for execution. Today, DMA is often combined with algorithmic trading
Algorithmic trading
In electronic financial markets, algorithmic trading or automated trading, also known as algo trading, black-box trading or robo trading, is the use of electronic platforms for entering trading orders with an algorithm deciding on aspects of the order such as the timing, price, or quantity of the...
giving access to many different trading strategies
Trading strategy
In finance, a trading strategy is a predefined set of rules for making trading decisions.Traders, investment firms and fund managers use a trading strategy to help make wiser investment decisions and help eliminate the emotional aspect of trading. A trading strategy is governed by a set of rules...
.
History
As financial markets moved on from traditional open outcryOpen outcry
Open outcry is the name of a method of communication between professionals on a stock exchange or futures exchange. It involves shouting and the use of hand signals to transfer information primarily about buy and sell orders...
trading on exchange
Exchange (organized market)
An exchange is a highly organized market where tradable securities, commodities, foreign exchange, futures, and options contracts are sold and bought.-Description:...
trading floors towards decentralised electronic, screen-based trading
Electronic trading
Electronic trading, sometimes called etrading, is a method of trading securities , foreign exchange or financial derivatives electronically...
and information technology improved, the opportunity for investor
Investor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...
s and other buy side
Buy side
Buy-side is a term used in investment banking to refer to advising institutions concerned with buying, rather than selling, assets or securities...
traders
Trader (finance)
A trader is someone in finance who buys and sells financial instruments such as stocks, bonds, commodities and derivatives. A broker who simply fills buy or sell orders is not a trader, as they are merely executing instructions given to them. According to the Wall Street Journal in 2004, a managing...
to trade for themselves rather than handing orders over to brokers for execution began to emerge. The implementation of the FIX protocol
FIX protocol
The Financial Information eXchange protocol is an electronic communications protocol initiated in 1992 for international real-time exchange of information related to the securities transactions and markets...
gave market participants the ability to route
Routing
Routing is the process of selecting paths in a network along which to send network traffic. Routing is performed for many kinds of networks, including the telephone network , electronic data networks , and transportation networks...
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 maker
Market maker
A market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn. From a market microstructure theory standpoint, market makers are net sellers of an option to be...
s, was first facilitated by electronic communication network
Electronic communication network
An electronic communication network is the term used in financial circles for a type of computer system that facilitates trading of financial products outside of stock exchanges. The primary products that are traded on ECNs are stocks and currencies. The first ECN, Instinet, was created in 1969...
s such as Instinet
Instinet
Instinet is an institutional, agency-only broker. As such, it executes trades for roughly 1,500 “buyside” clients such as asset management firms, hedge funds, insurance companies, mutual funds and pension funds...
. Recognising the threat to their own businesses, investment banks
Investment banking
An investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities...
began acquiring these companies (e.g. the purchase of Instinet in 2007 by Nomura Holdings
Nomura Holdings
Nomura Holdings, Inc. is a Japanese financial holding company, and a principal member of the Nomura Group.In October 2008 the company acquired Lehman Brothers Holdings's investment banking and equities unit in Asia and Europe and kept on most of its employees. Nomura paid $225 million for the...
) 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
Algorithmic trading
In electronic financial markets, algorithmic trading or automated trading, also known as algo trading, black-box trading or robo trading, is the use of electronic platforms for entering trading orders with an algorithm deciding on aspects of the order such as the timing, price, or quantity of the...
solutions giving access to many different trading strategies
Trading strategy
In finance, a trading strategy is a predefined set of rules for making trading decisions.Traders, investment firms and fund managers use a trading strategy to help make wiser investment decisions and help eliminate the emotional aspect of trading. A trading strategy is governed by a set of rules...
.
Benefits
There are several motivations for why a trader may chose to use DMA rather than alternative forms of order placement:- DMA usually offers lower transaction costTransaction costIn economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange . For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal...
s 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 leakageInformation leakageInformation leakage happens whenever a system that is designed to be closed to an eavesdropper reveals some information to unauthorized parties nonetheless. For example, when designing an encrypted instant messaging network, a network engineer without the capacity to crack your encryption codes...
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 wallChinese wallIn business, a Chinese wall or firewall is an information barrier implemented within a firm to separate and isolate persons who make investment decisions from persons who are privy to undisclosed material information which may influence those decisions...
. - 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.
Ultra-low latency direct market access (ULLDMA)
Advanced trading platforms and market gateways are essential to the practice of high-frequency tradingHigh-frequency trading
High-frequency trading is the use of sophisticated technological tools to trade securities like stocks or options, and is typically characterized by several distinguishing features:...
. Order flow can be routed directly to the line handler where it undergoes a strict set of Risk Filters before hitting the execution venue(s). The race for ultra-low latency direct market access is a hot topic amongst high frequency traders, Brokers and technology vendors such as Ullink
ULLINK
ULLINK is an independent software company founded by electronic trading professionals and provides trading systems and services to the financial services sector....
or Fidessa
Fidessa
Fidessa Group plc is a British-headquartered company which provides software and services such as trading systems to clients in the financial services sector...
. 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 (DSA) and Smart Order Router.
Foreign exchange direct market access
Foreign exchange direct market access (FX DMA) refers to electronic facilities that match foreign exchange orders from individual investors and buy-side firms with bank market maker prices. FX DMA infrastructures 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 marketInterbank market
The interbank market is the top-level foreign exchange market where banks exchange different currencies. The banks can either deal with one another directly, or through electronic brokering platforms. The Electronic Broking Services and Thomson Reuters Dealing 3000 Xtra are the two competitors in...
and individuals trading retail forex, to trade in a transparent, low latency
Latency (engineering)
Latency is a measure of time delay experienced in a system, the precise definition of which depends on the system and the time being measured. Latencies may have different meaning in different contexts.-Packet-switched networks:...
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 (0-9) of one-tenth pip or percentage in pointPercentage in pointIn finance, a percentage in point is the smallest commonly quoted change of an exchange rate of a currency pair.The major currencies, except the Japanese yen, are priced to four decimal places. For these currencies a pip is one unit of the fourth decimal point, or 1/100th of one percent...
consistent with professional FX market quotation protocols not half-pip pricing (0 or 5). - 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(s).
- 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 volatilityVolatility (finance)In finance, volatility is a measure for variation of price of a financial instrument over time. Historic volatility is derived from time series of past market prices...
, pending or recently released news, as well as market makerMarket makerA market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn. From a market microstructure theory standpoint, market makers are net sellers of an option to be...
trading flows. By definition, FX DMA market structures cannot show fixed spreads, which are indicative of dealer platforms. - Platforms build a fixed mark up into the client’s dealing price and/or charge a commissionCommission (remuneration)The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. Payments often will be calculated on the basis of a percentage of the goods sold...
.
See also
- Market makerMarket makerA market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn. From a market microstructure theory standpoint, market makers are net sellers of an option to be...
- Direct access tradingDirect access tradingDirect access trading is a technology which allows stock traders to trade directly with market makers or specialists, rather than trading through stock brokers....
- Straight Through ProcessingStraight Through ProcessingStraight-through processing enables the entire trade process for capital markets and payment transactions to be conducted electronically without the need for re-keying or manual intervention, subject to legal and regulatory restrictions...
- Electronic Communication NetworkElectronic Communication NetworkAn electronic communication network is the term used in financial circles for a type of computer system that facilitates trading of financial products outside of stock exchanges. The primary products that are traded on ECNs are stocks and currencies. The first ECN, Instinet, was created in 1969...
External references
Algorithmic Trading and DMA: An introduction to direct access trading strategies, Barry Johnson, 4Myeloma Press, February 2010.