1. What is Direct Market Access?
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.
2. Can you give me an example?
The term buy at bid and sell at offer is often used when talking about DMA. 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, in theory you can do this with DMA. 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.
3. What are the benefits over traditional forms of buying/selling shares?
General benefits of direct 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 broker/dealer. This suggests that investment performance can be improved regardless of the number of trades per day, or per year.
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.
4. What is an order book?
The order book is simplicity itself, a two column listing of those wanting to buy at a specific (limit) price and no higher, in the other column a list of those that want to sell at a specific price and no lower. The columns are both arranged on a price/time priority basis, the highest price someone will pay for a stock will be at the top of the buy column and the lowest price someone is prepared to sell is at the top of the sell column.
5. Who uses the order book?
The order book is populated by limit orders placed by private investors, institutions and market makers. Only on SETSmm can you actually see the names of the market makers.
6. I have heard of Level 2 but what is it?
To see the order book columns described above and associated data you will need to subscribe to a Level 2 data service, this service will display the market maker columns on the appropriate SEAQ stocks as well. Level 2 is a more detailed display showing the full depth of the market you are looking.
7. There are a lot of orders a long way off the top prices, should I ignore them?
All orders on the order book are firm and orders away from the market price may be there to profit from volatility in the stock when it would be possible to buy cheaply or sell at a high price.
8. Is it worth me placing a limit order a long way off the current bid/offer prices?
The answer is yes, provided you are prepared to wait for the price to move to you before it is filled. On some stocks the order book thins very quickly so your ‘away’ price might soon come close to being the best price quoted.
9. Can I go short on stocks entering a limit order directly in the order book?
Depending on the type of account with the DMA, you may be able to open a short position.
10. How can I trade on the order book?
You will need to open an account with a broker/provider. If your current broker does not offer this service look at Locate a DMA broker.
11. In a fast moving market I cannot always deal through my broker, will DMA be better?
There are no guarantees, but in previous periods of high volatility when many brokers were unable to obtain quotes for clients via the traditional quote driven system, the order book system continued to perform very effectively.
12. I can already post limit orders with my broker - why is DMA better?
Limit orders left with brokers are not displayed publicly but merely poll RSPs when the price moves past the limit order - i.e. you are still paying the spread, it is just the spread that has moved. With DMA you get the opportunity to post your limit publicly for the entire market to interact with and you can buy at the bid or sell at the offer, thus making the spread for yourself. There is therefore an increased opportunity to trade at a better price through DMA.
13. My broker is insisting that I confirm my understanding of the order book before allowing me access to DMA - why is this?
Your broker is responsible for all orders submitted by or through it to the order book and will have controls in place to help prevent erroneous orders from being submitted. One of these controls is to require a certain level of expertise from its customers. By reading and familiarising yourself with these pages, you can only help your understanding.