#DMA: catalyst for competition?

Direct Market Access (DMA) is the electronic facility supplied by sell-side firms to allow buy-side to access liquidity for securities they may wish to buy or sell. Buy-side firms can benefit from using DMA because it requires less work from brokers and lowers transaction cost. But DMA also increase risks potentially because trades are done at extremely fast speed and therefore post high demand on risk control measures.

To a certain degree, DMA allows smaller brokers to compete with the big ones. By using a large firm’s algorithms, smaller firms stand a chance of utilizing such advanced, light-speed technology they would not have been able to afford otherwise. So when words came out that European Parliament wanted to suggest banks to be banned from giving outside brokers direct access to markets a couple weeks ago, DMA users’ response is not warm to say the least.

In fact, the most damaging DMA practice has been banned by the SEC in the US already: “naked access”, which allows high-speed traders and others buy and sell stocks on exchanges using a broker’s computer code without requiring them to filter through the broker’s systems or undergo any pre-trade checks, is no long in use since 2010. And exchanges are working on their level of risk controls to prevent malicious trades from disrupting the market.

DMA’s benefits do not limit itself at increasing trading speed; it also helps investors and traders access markets that are otherwise hard to reach, such as some Asian markets. At the Exchange Technology World Chicago conference, a panel of global trading experts made of high frequency trader, algorithmic broker and international exchange would discuss how to take advantage of DMA in the current changing regulatory environment.