Historically, access to financial trading on the order book has been limited, with investors having to go through the medium of broker-dealers or through members of the exchange that are market-makers. Opportunities for buy-side traders and investors to access the market directly have increased hand in hand with advancements in information technology. Now that most trading takes place electronically via screens and is essentially decentralised, rather than the traditional open outcry trading floor system, there are ways in which buy-side traders and investors can execute trades themselves rather than going through a broker. This opportunity is known as Direct Market Access, or DMA, which is a professional interest of Lenn Mayhew Lewis.
DMA Trading Transactions
Investment companies and private investors today can utilise technology to gain direct access to sell-side information technology infrastructure. Sell-side firms include investment banks and other firms with market access. Traders can manage and control each transaction themselves through to execution, rather than passing the order to be executed by the in-house traders of a broker. Many different trading strategies can therefore be accessed by today’s traders, especially where DMA is combined with different types of algorithmic trading. However, regulatory concerns have been raised regarding certain types of DMA trading, particularly the type known as sponsored access, as there is potential for widespread disruption in the markets to be caused by investor malfunction.
In the infographic attachment you can see some of the benefits to traders of choosing Direct Market Access over traditional broker trading.
DMA on the London Stock Exchange
Direct Market Access trading is a relatively new opportunity for UK investors buying and selling orders on the London Stock Exchange. The service is offered only by some stockbrokers and focuses on sophisticated private investors, enabling eligible private investors to trade on a level playing field as market professionals. You can learn more about the history of the London Stock Exchange via the PDF attachment to this post. The benefits of DMA have been widely available in other stock exchanges around the world, but only introduced recently for UK investors. Now, certain investors can take more control over their trades, enjoying trades of equal status and a greater depth of order book. To begin DMA trading, investors in the UK need to set an account up with one of several DMA providers.
Non-Order Book Trading vs. Order Book Trading
With non-order book trading, shares are traded through stockbrokers by private investors. A number of prices are requested by the broker from market makers known as Retail Service Providers, or RSPs. These prices are called ‘retail prices’ as they relate to relatively small volumes of shares. The broker then supplies the investor with the best available price.
Order book trading, on the other hand, executes directly through the order books of the relevant Exchange, without going through the RSP network. Order book trading is mostly used by large institutional investors rather than private investors or small investment firms. Brokers offering DMA are essentially granting smaller firms and private investors access to the institutional market, enabling them to enter orders into the book directly and missing out the RSPs. This often grants access to larger trade sizes than through non-order book trading.
UK DMA traders can access Cash services or Contract for Difference (CFD) services. You can learn more about what a CFD is by watching the short video attachment.