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The Shifting Shares View – Why direct market access is critical to making the most out of your trades

Put simply, direct market access is the ability to deal directly in the market. This can be by placing orders onto the exchange on SETS listed stocks or by dealing directly through market makers with a telephone broker.

Advantages of SETSqx?

On SETSqx, we are at the mercy of the market makers. We deal at their prices, and we are not able to set our levels to interact with other market participants. All dealing – apart from in the auctions – is done through market makers.

Market makers (you will often find them referred to as various names on bulletin boards – none of these polite) like to take advantage of private investor’s weakness like their lack of understanding of the market, and make the most of their lack of conviction in what private investors buy.

They do this in various ways, such as messing with the spread, tree shaking, and creating false bids. Market makers know that they are not obliged to offer online quoted prices over the RSP. Which is exactly what they do – they offer whatever they like.

The price online to buy could be 15,000 shares at 35p, but if the market makers are low on stock and do not want to sell any – they simply hike up the ask to 38p – or whatever price they want.

This is where telephone dealing comes in handy. Market makers will bluff and play games all they want online because they can get away with it, but very few private investors know that market makers are obliged to deal at the Normal Market Size (NMS) and price quoted online.

This point means that if we want to buy 15,000 shares at 35p, but you can only buy at 38p online, we can simply call up our broker, who then goes directly to the market makers, and gets this order filled. The market makers then have to fill this order because they are obliged to when dealt with over the telephone.

Very often, we can deal several times NMS too as market makers know that if they do not perform, the broker will go to someone who will fill the order and they will end up losing out on business.

Another advantage of telephone dealing is that we can have orders worked. If we are carrying several times NMS or we wish to buy a large amount of stock that would push the price up, we can have our broker work that order on the book and get us the best price in a way that an online broker would not allow.

Having this direct market access is, of course, more expensive than a simple online execution only broker. However, if we are buying £20,000 worth of stock and we get a price 10pc cheaper than what we would have got one, then price is relative.

Advantages with SETS

The advantages of this are we get better execution.

If we place our orders directly onto the exchange, then we become the market maker. This has the advantage of getting much better prices, and we are able to place our buy price directly onto the bid rather than buying at the offer as we do when dealing through market makers.

We can also set our sell orders and place these directly onto the exchange. If we get filled – we are filled at our desired prices. We can leave these orders on all day if we wish and see what happens.

Another advantage of IG’s Level 2 dealer is that we can set parent orders with waves that can be modified at will.

I have covered SETS and DMA in my book – available to download for free on my website, shiftingshares.com

Valuethemarkets.com and Dynamic Investor Relations Ltd are not responsible for the content or accuracy of this article.  News and research are not recommendations to deal, and investments may fall in value so that you could lose some or all of your investment. Past performance is not an indicator of future performance.

  • Michael Taylor does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the piece.
  • Michael Taylor has not been paid to produce this piece by the company or companies mentioned above.
  • Dynamic Investor Relations Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.

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