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James Chen, CMT is an expert trader, investment adviser, and global market strategist.
Updated April 02, 2024 Reviewed by Reviewed by Thomas BrockThomas J. Brock is a CFA and CPA with more than 20 years of experience in various areas including investing, insurance portfolio management, finance and accounting, personal investment and financial planning advice, and development of educational materials about life insurance and annuities.
Fact checked by Fact checked by Suzanne KvilhaugSuzanne is a content marketer, writer, and fact-checker. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies for financial brands.
Direct market access (DMA) refers to access to the electronic facilities and order books of financial market exchanges that facilitate daily securities transactions. Direct market access requires a sophisticated technology infrastructure and is often owned by sell-side firms. Rather than relying on market-making firms and broker-dealers to execute trades, some buy-side firms use direct market access to place trades themselves.
Direct market access is the direct connection to financial market exchanges that makes the completion of a financial market transaction final. Exchanges are organized marketplaces where stocks, commodities, derivatives, and other financial instruments are traded.
Some of the most well-known exchanges are the New York Stock Exchange (NYSE), the Nasdaq, and the London Stock Exchange (LSE). Individual investors typically do not have direct market access to the exchanges. While trade execution is usually immediately enacted, the transaction is fulfilled by an intermediary brokerage firm.
While brokerage firms can work on a market-making quote basis, it has become more common since the 1990s for brokerage platforms to use direct market access for completing the trade. With direct market access, the trade is executed at the final market transaction phase by the brokerage firm.
The order is accepted by the exchange for which the security trades and the transaction is recorded on the exchange's order book. Intermediary brokerage firms are known to have direct market access for completing trade orders. In the broad market, various entities can own and operate direct market access platforms.
Broker-dealers and market-making firms have direct market access. Sell-side investment banks are also known for having direct market access. Sell-side investment banks have trading groups that execute trades with direct market access.
In the financial markets, sell-side firms offer their direct market access trading platforms and technology to buy-side firms who wish to control the direct market access trading activities for their investment portfolios.
Examples of buy-side entities include hedge funds, pension funds, mutual funds, life insurance companies, and private equity funds. This form of control over trading activities is considered sponsored access.
The technology and infrastructure required to develop a direct market access trading platform can be expensive to build and maintain.
Companies that offer direct market access sometimes combine this service with access to advanced trading strategies such as algorithmic trading. Thus, there are agreements between direct market access platform owners and sponsored firms that outline the services offered and the stipulations of the agreement.
With direct market access, a trader has full transparency of an exchange’s order book and all of its trade orders. Direct market access platforms can be integrated with sophisticated algorithmic trading strategies that can streamline the trading process for greater efficiency and cost savings.
Direct market access allows buy-side firms to often execute trades with lower costs. Order execution is extremely fast, so traders are better able to take advantage of very short-lived trading opportunities.
Market regulators such as the Financial Industry Regulatory Authority (FINRA) oversee all of the market’s trading activities and have raised some concerns over the sharing or sponsored access agreements offered by sell-side firms.
If a buy-side firm does not have direct market access, then it must partner with a sell-side firm, brokerage, or bank with direct market access to determine a trading price and execute the final transaction.
FINRA's concern stems from the potential market disruption that could occur if poorly regulated direct market access results in trading errors caused by computers or humans. The damage from these trading errors could be compounded by high-speed trading automation and high-volume trading.
To address these trading risks, the Securities and Exchange Commission (SEC) requires firms that provide direct market access to maintain a system of risk management controls over the trading actions allowed through sponsored access.
A direct market access order is a trade placed by a trader directly with an exchange on its order books without having to go through a brokerage as an intermediary. This allows transparency, efficiency, and better pricing for the trader.
The Market Access Rule is Rule 15c3-5, which requires institutions with market access or that provide market access to clients to "appropriately control the risks associated with market access so as not to jeopardize their own financial condition, that of other market participants, the integrity of trading on the securities markets, and the stability of the financial system."
Direct market access (DMA) differs from over-the-counter (OTC) in that DMA places trades directly with an exchange while OTC happens outside of exchanges and directly between parties. DMA offers more transparency, liquidity, regulation, and better pricing.
Banks and other financial institutions provide clients with direct market access to electronic facilities and order books of exchanges to facilitate and complete trade orders. With the advent of electronic trading, direct market access has made the process of executing trades much more efficient for traders as they can gain access directly without having to rely on an intermediary.
