Shares City | What is DMA ?

Shares City : What is Direct Market Access (DMA) ?

Direct Market Access (DMA) is a method which allows private investors to buy and sell stocks and shares directly from or to other private investors. About time too I might add.

Normally, private investors buy and sell stocks from brokers who act as an intermediary with market makers. DMA gives private investors greater control of their trades by dealing directly with other market participants, although this does not quite cut out the middle man, as you will still need to use a broker but one that offers DMA.

The great advantage of DMA is that it allows you to trade inside the spread. Normally a broker will quote you a price such as 220 – 224 which means you can buy at 224 but you can only sell at 220 the 4 point difference being referred to as the ‘spread’. Trading inside the spread is obviously an advantage as it means the stock price does not have to move as much before you are in profit.

The advantages of DMA to the private investor are:-

It creates a more level playing field
All orders on the order book have the same status, they are only prioritized with regard to price and time.

Increased visibility
Orders are visible to the whole market. This allowing all market participants “full contribution to central market liquidity”.

The depth of order book is visible
This ensures that you are aware of the number of buyers and the number of sellers and also the price at which they are willing to trade.

You can set your own price
Limit orders can be set at a price of your choosing and they are made available to the whole market.

Spreads are tighter
Limit orders are on public rather than private display, this ensures tighter spreads, which benefits the participant who placed the order, as he/she has a greater chance of obtaining the price specified. It also benefits the market as a whole as the public reference price is tighter.

Participation in the auction
Private investors can participate in auctions pre-market and post-market which is where the highest and lowest prices are often seen.

It would appear that in the UK we are late to the table in so far as concerns DMA, but given the obvious advantages I suspect it will become more available. So where do we sign up ?