Direct Market AccessPriyanshu Ahuja
Direct Direct Market Access
The essence of the exchange is its Electronic Systems, a mechanism that compares a purchase order and a sell order against a bid and ask price to establish a trade. Electronic systems are used to different extents for trading in financial markets, varying among markets, across forms of transactions and clients, and between the different phases of the trade process. Presently traders trade securities by placing the order directly on stock exchange order books and electronic communications network brokers (ECNs) via Direct Market Access (DMA trading). DMA encourages traders to become market makers instead of price makers.
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What is DMA?
Direct market access refers to the use of electronic trading and books of monetary markets exchange that facilitates daily securities transactions. Generally, trading is accessible to the brokers and the market making firms that are a member of the exchange. Using DMA, investment companies and traders use the IT technology (algorithmic strategies ) and knowledge of Investment Banks (fundamental analysis ) but can control the way a transaction is managed instead of passing the order to the broker’s in-house traders for action.It removes all intermediaries and links traders, both retail and institutional, to other market/exchange liquidity suppliers.
How does DMA work?
Prior to the implementation of the DMA, trading would take place by communication between brokers and customers, and the orders would then be executed on the stock exchange.DMA empowers you to interact with stock or cash trades straightforwardly- bypassing any total of over-the-counter requests so that you can get the value you need to bargain at. Hence, When combined with smart algos and low latency exchange servers. DMA can provide clients with extremely fast and efficient execution.
One can get into DMA in @ different ways:
- CFD exchanging on shares and forex: It enables you to go long or short on costs without taking ownership of hidden resources. DMA on forex is just accessible to proficient customers.
- Share dealing: It enables you to purchase stocks and take ownership. You’ll possess the stock no matter how long you hold it.
- Let’s take an example that you need to exchange shares with DMA. You will check the best cost accessible to either purchase or sell. Then you would submit your request and the merchant will do a brisk check whether you have enough margin to open the position or not. Then after a few seconds, the order will be placed straightforwardly into the exchange’s order books.
- If you want to buy shares directly from DMA you would check the price available to buy. You would be required to pay the full amount to open the position into the account. As with trading, the order will be placed into the exchange’s order book.
Pros and Cons
- An advantage of DMA is that you no longer have to trade through the medium of brokers and their in-house traders. You will be in charge of your exchanges. Likewise, the cost of the transaction will be lower.
- By buying with DMA you are simply paying for innovation /technology. In a conventional way, you were paying for the broker’s expertise and knowledge.
- All the orders are visible to the entire markets, the market participants can effectively gauge market liquidity as the order book will show the total no. of buyers and sellers.
- As all orders are of equal priority in terms of price and time therefore creates an equal playing field for all the market participants.
- And since the prices are gathered from a wide range of global banks, stock or currency exchange, and liquidity providers. DMA offers competitive prices.
While there is a range of pros, there are several cons to DMA:
- DMA is heavily regulated, which can be a good thing as it ensures trades are carried in a responsible way.
- It makes trading less flexible than over-the-counter (OTC) trades.
- DMA prices are not necessarily better than OTC.
- Once you have placed the order you cannot change or reverse the position. However, you can close your position at any time.
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We can conclude that DMA has its pros and cons but we can say that it is useful for traders as it takes less money to do a transaction. They can also see the market purchase and selling taking place. Trading within the mechanism of the DMA gives market participants the ability to engage the market with maximum efficiency. It is seen by many as a crucial part of a comprehensive active trading initiative.
Author – Priyanshu Ahuja
About the author – I’m a first-year student from City Premier College, Nagpur, pursuing BBA. My interest includes financial markets and investment domain.