A stock broker who has Direct Market Access (DMA) will send your orders directly to the stock market. Brokers without direct market access will typically work with one or more stock Market Makers (MM:s) instead, which are companies that buy and sell stock. They will send your order to the market makers.
A vast majority of the retail stock brokers available online do not have direct market access, but there are exceptions and you can select a broker with DMA if you want to even as a retail trader. The largest selection is available to traders in the United States, but the trend is picking up in other parts of the world as well, including Canada, Europe and parts of Asia.
So, why do some traders prefer to use brokers with direct market access? There are several reasons for this. Sometimes, it is possible to obtain a better price with DMA. Sometimes, the reason you get a better price is because the execution is carried out quicker. It should also be noted that certain advanced trading strategies requires a DMA broker to attain the right level of execution control.
Examples of stock brokers offering DMA for retail traders
- Saxo Bank
- Interactive Brokers
- iDealing
- Barclays Stockbrokers (via Saxo´s infrastructure)
- OCBB
- DBS Vickers
Understanding the difference between quote-driven markets and order-driven markets
If your broker offers direct market access, your order will go directly to the exchange. Today, the markets for highly liquid stocks are typically order-driven and on such a market the order sent to the exchange will go directly into an order book.
So, what´s the difference between a quote-driven market and an order-driven market? A market where you obtain a quote is then decide if you want to accept it or not is called a quote-driven market. The guy with the market stand is offering his apples for sale for $1 per dozen. It is up to you, the buyer, to accept this quote or not.
With the rise of fully electronic stock trading in the late 20th century, a new type of market developed for stocks: the order-driven stock market. A stock exchange will keep an electronic order book and market participants will submit their orders to the book, both buy orders (with amount of stock and the price they are willing to pay) and sell orders (with amount of stock and the price they are willing to sell for).
- If Participant A places an order to buy at $10 and Participant B places an to sell at $10, then the order book will match the two and a trade will take place.
- If a participant places a order to buy or sell at the market price – rather than specifying a fixed price – this order will be matched with the best price available in the order book.
This type of order-driven market works best when there is plenty of liquidity, e.g. when dealing with heavily trades stocks. That is why some stock exchanges only use it for the stocks with the most liquidity. One example is the well-known London Stock Exchange (LSE). At the LSE, stocks with comparatively low liquidity are traded using a quote-driven system called Stock Exchange Automated Quotation system (SEAQ). Stocks with higher liquidity are traded through the electronic order book system known as the Stock Exchange Electronic Trading System (SETS), which is order-driven. There is also the two platforms SETSmm and SETSqx for the stocks in between. To put it simple, SETSmm and SETSqx use the order-book solution but combines it with market makers to boost liquidity.
What is the difference between true DMA and one-touch DMA?
In some parts of the world, the regulatory framework does not permit true direct market access. Instead, a human must check every order and manually sent it on to the exchange. This is known as one-touch DMA. Typically, the human is required to check if the trader has sufficient funds to cover the order.
With true DMA, the order goes straight to the exchange without any human checking it first. Typically, a computerized system will be in place to check for things such as the trader having sufficient funds.