DMA trading

Equities, commodities, futures, foreign exchange and other tradable securities within the financial markets are bought and sold on an exchange, which is often referred to as an organised market. Liquidity providers are entities that hold a large quantity of a financial product. They provide financing for the security and then facilitate its trading in the direct market. Since they ‘make the market’ for the security, they are therefore often referred to as market markers. Today, traders can trade securities by placing orders directly on the order books of stock exchanges and electronic communication network brokers (ECNs) through direct market access (DMA trading). DMA empowers traders to become market makers rather than price takers.

The direct market comprises of buy side and sell side entities. Sell side entities engage in the sale of financial instruments. These could include liquidity providers and market makers. Buy side entities engage in the buying of financial instruments. These could include asset management companies and private investors. In the foreign exchange market, orders are usually placed on the order books of ECNs. In the share market, orders for DMA share trading are usually placed in the central limit order book of an exchange. ECNs and exchanges bring together buy and sell side entities. Their order books comprise of the ask prices of financial products on offer by sell side participants, and the bid prices for the same by buy side participants.

Contracts for difference (CFDs) are trades between a CFD provider and a client. A CFD does not give ownership of the underlying financial instrument to the client. It is an agreement between the CFD provider and the client to settle in cash the difference between the opening and closing prices of the CFD. The CFD provider will base the price of a CFD on the price of the underlying financial instrument in the direct market. CFDs are not traded on exchanges in the organised market and are classified as over-the-counter trades.

CFDs are traditionally quote driven. The CFD provider gives the trader a quote with an ask price based on the price of the underlying financial instrument in the direct market. These orders are then aggregated by the CFD provider and placed in the direct market for execution. CFD providers hedge their market exposure in this manner. A quote-driven CFD provider is therefore a market maker.

When a client trades a contract for difference using DMA CFD trading, the provider instantaneously places a corresponding order in the direct market. This hedges the CFD provider’s exposure. The order placed by the provider in the direct market mirrors the price, volume and instructions of the CFD. This order appears as an individual entry on the order books of the ECN or exchange.

DMA trading platforms can often be used with algorithmic trading strategies, as they are useful for both and sell traders. Algorithmic trading helps to quicken the trading process and achieve best execution for each position. This can also help the trader to save money as automated trading systems are generally more efficient and present less risks. The meaning of direct market access with algorithmic trading also helps to take advantage of order execution and fast transactions that traders may not have time to spot themselves.

Direct market access platforms often come in the form of brokers. DMA trading platforms aim to combine quick algorithmic strategies with efficient order execution to achieve the best results, but some can also focus more on fundamental analysis and funcionality of the platform. A DMA trading platform is also very useful for block trades​, as direct market access software is prepared to place large volumes of trades in one go, with a speedy execution and results.