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.
It requires a sophisticated technology infrastructure to enable access to electronic facilities and order books of financial market exchanges that facilitate daily securities transactions. It is often used by buy-side-firms to execute trades themselves rather than relying on market-making-firms or broker-dealers.
Direct market access provides a direct connection to the financial market exchanges to make the completion of a financial market transaction final. Exchanges where stocks, commodities, derivatives and other financial instruments are traded include, the New York Stock Exchange (NYSE), the NASDAQ and the London Stock Exchange (LSE).
How direct market access works
Direct market access platforms are available from a range of providers, often sell-side firms. They offer their direct market access technology and platforms to buy-side firms looking to control the direct market access trading activities for their investment portfolios.
Investors use direct market access to execute the trade at the final market transaction. The exchange will then accept the order and the security trades and transactions are recorded on the exchange’s order book which are then visible to any other investors that use direct market access.
Essentially, direct market access enables investors to interact with stock or currency exchanges directly, without the need for brokers. Having this control means investors can bypass any cluster of over-the-counter-orders and have flexibility and freedom to choose the price they want to deal at.
Cutting out the middleman means you have access to better pricing, higher liquidity, faster execution and better overall control on your trades.
Types of direct market access
Direct market access platforms are authorised and regulated in the UK by the Financial Conduct Authority (FCA). Finding the right provider will depend on the types of trades or markets traders want to deal in, such as CFD trading, spread betting or forex.
There are a variety of providers of direct market access, including:
- Interactive Brokers
- IG Markets
Advantages of direct market access
There are a host of advantages with direct market access, including:
Direct market access gives you greater visibility and therefore greater control of the market. All orders are visible to the entire market, which gives traders the opportunity to effectively gauge market liquidity.
With direct market access comes more transparency and a level playing field between different market participants. It allows you to see other traders’ movements, meaning you can see their behaviour and get a better gauge on market sentiment. This ultimately could help inform your investment decisions.
Delivers competitive pricing
Using direct market access means that prices are gathered from a wide selection of global banks, stock or currency and liquidity prices, giving you greater access to more competitive pricing. You can even set your own price with limit orders which are available across the entire market.
Disadvantages of direct market access
As with all types and methods of trading there are always disadvantages, when it comes to direct market access these include:
Direct market access can be complex and is best suited to advanced traders, rather than those that are new to the market. Also, the technology infrastructure that is required can be costly to setup and maintain so may not be ideal for small traders.
The costs of using and trading with direct market access goes beyond the technology requirements, the price of direct access trading systems are usually higher than those you will pay to work with an online broker. The commission you pay can also be double of what you would pay with a traditional broker.
When it comes to direct market access you will typically find that it is stricter than other methods of trading. Usually there are stringent rules around repeat dealing or deal rejections if trading outside the normal market size. Also if an investor’s trading account becomes inactive or isn’t used very often, penalty fees can be applied.