One of the decisions you will have to make when selecting a stockbroker is weather you wish to chose one who has Direct Market Access (DMA) or one that works through a Market Maker (MM).
Many retail investors never even ponder this question, and does not know the difference between the two options.
What is Direct Market Access (DMA)?
With Direct Market Access (DMA), your order to buy or sell stock is sent directly to the stock exchange for execution.
Most of the online stock brokers catering to the needs of small retail investors and traders do not have direct market access. Instead, they work with a market maker. This practise is not a new one; it was common practise even before the advent of online retail trading. An investor would call or visit their stock broker to place an order with the broker, and the stock broker would request a quote for that order from a market maker. The market maker would be a company that was willing, ready and able to buy and sell stocks, and would quote both a bid price and an offer price. The market maker would do many transactions and profit from the difference between bid and ask – the so called bid/ask spread.
There are online stock brokers available today that doesn´t have direct market access but that do have access to several different market makers. That way, they can poll several market makers for you and present you with the best quote. The quote will be available for a fixed period of time before expiring. This way, they do not become dependant on the offers of just one market maker.
Why do some traders want DMA?
A few examples of why some traders want brokers with Direct Market Access:
- Travelling via an additional intermediary can slow down trade execution.
- Sometimes direct market access will give you a slightly better price than what any market maker has to offer.
- There is no market maker in between who needs to make money.
- The more steps, the more risk of error. Cutting out the market maker removes a step.
- Certain advanced trade strategies require a level of execution control that can only happen through direct market access.
- Direct Market Access is attractive to institutional traders who seek a high level of anonymity.
True DMA vs. one-touch DMA
If you have true DMA, orders will go straight to the exchange without any human relaying it. (Although the broker´s computerized system will probably do automated checks.)
With one-touch DMA, a human at the broker´s office must push a button to send your order through to the exchange. This slows down the process compared to true DMA and human error becomes a risk factor.
So, why do one-touch DMA exist? Typically, due to legal reasons. In some jurisdictions, the law or a regulatory body does not allow true DMA. The rule book might for instance demand that a human always confirms that the trader´s account has sufficient money or other assets to cover the order, before the order is allowed to be sent on to the exchange.
Is DMA possible for retail investors?
For most retail investors, having direct market access or not is a non-issue. They simply don´t care or even know about DMA. But if you are interested in obtaining direct market access through a broker, it is actually possible even for a retail investor. The broker selection is especially large for traders in the United States, but a few choices are available for Canada, Europe and Asia too, at least for major markets.
Examples of good places to start looking:
- Saxo Bank
- Interactive Brokers
- iDealing (for certain European countries, including the UK)
- Barclays Stockbrokers (via Saxo´s infrastructure)
- OCBB, which is Singapore-based
- DBS Vickers, which is Singapore-based