Member firms (including institutions and market makers / RSP’s) have been trading on the order book since it was launched in 1997, and private investors increasingly have the opportunity to trade alongside them by using a broker which offers Direct Market Access (DMA).
Direct Market Access (DMA) refers to the platform or mechanism whereby an individual can enter their limit orders directly into the market. A buyer can therefore add their own orders to the buy and sell columns instantly, and ‘advertise’ the quantity and price of a stock at which they are willing to trade.
The terms buy at bid and sell at offer are often used when talking about Direct Market Access. On a stock trading at 95p (bid) and 100p (offer), traditionally someone would buy this stock via a broker at the offer price of 100p and sell at the bid price of 95p. Wouldn’t it be valuable to reverse this and sell at 100p and buy at 95p? It is possible to do this with Direct Market Access. Simply enter a sell order at 100p and your sell order will appear in the sell column and be advertised to buyers, conversely you want to buy, you can enter a buy order at 95p and wait for a seller to sell stock to you. Notice you have become a virtual market maker!
General benefits of Direct Market Access and order book trading include the speed of execution and the potential for better pricing than investors may otherwise receive by using a third-party market maker.
The ability to join the buyers and sellers order book columns can create opportunities to buy or sell well within the perceived spread, a potential cost saving on a transaction.
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Cons |
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Equal playing field – every order is of equal status on the order book, prioritised only in terms of price, date and time. |
While market orders are available for immediate execution, for the keenest pricing, larger orders may require working over time. |
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Orders are visible to the entire market and the order book provides the only price published to and accessible by all market participants so allowing full contribution to and benefits of central market liquidity. Participants can see what price others are willing to buy/sell the stock for, helping them make a more informed investment decision. |
No extended settlement. |
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Limit orders can be entered, meaning you can set your own price either within or outside of the spread and wait for it to be hit. |
Potential higher broker commission costs (though this is normally more than outweighed by saving on execution price – please see the order book simulator for an example). |
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Liquidity is concentrated in one venue, increasing opportunity for tighter spreads. This benefits all private investors as this price formation process feeds into RSP pricing as well. |
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Regulation and market supervision by the London Stock Exchange. |
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