InvestorQ : What is meant by direct market access in the stock markets and can I as an investor use the same?
Aashna Tripathi made post

What is meant by direct market access in the stock markets and can I as an investor use the same?

Tisha Malhotra answered.
3 years ago

Direct market access (DMA) is not available for individuals but only for institutions like FIIs, mutual funds, institutions and for major brokers running their own proprietary desks. Direct market access (DMA) was first introduced by SEBI in 2008 and was put into active operation in 2009. Many foreign investors have taken the benefit of DMA trading although many investors do complain that the lack of volumes at times become a hindrance for the use of DMA in India.

Understanding the concept of Direct Market Access

Direct market access (DMA) in financial markets describes electronic trading facilities that give investors trading in equity and debt a way to interact with the order book of the exchange. Normally, the FPIs call up the broker or communicate the order via Bloomberg Chat. That is where DMA is different. Direct Market Access (DMA) facilitates through various connectivity modes (CTCL or FIX) permits trading members to provide direct trading terminals to their DMA clients. Effectively, Broker X can provide a terminal to their client Morgan Stanley sitting in Hong Kong and the trader at MS can place orders from HK itself. These orders ride the DMA pipe and execute through the broker.

Effectively, DMA allows brokers to offer clients direct access to the exchange trading system through the broker's infrastructure without any manual intervention by the broker. DMA has some advantages in that it offers direct control to clients over orders, faster execution of client orders, reduced risk of errors associated with manual order entry, greater transparency, increased liquidity, lower impact costs for large orders. This is especially useful in case of futures and options orders where large conditional orders have to be executed at short notice.

Here is how DMA works

Trading of securities can take place only when buyers are able to meet sellers on a common platform called the market. In securities, the stock exchange plays that role. But in stock exchanges, buyers meet sellers only through a broker, who acts as an intermediary. That is where the impediments to an order start. Calling up the broker, then confirming the order, reconciliation at the end of the day, forex hedging can all be quite cumbersome.

Prior to introduction of DMA, trading would take place by interaction between brokers and clients and then the orders would be executed on the stock exchange. If automatic and electronic order matching was the first step away from the open cry system, the second step was via the combination of DMA, algorithmic trading and low latency execution offerings. The DMA, when combined with smart algos and low latency servers at the exchange can ensure extremely speedy and efficient execution for clients.

Does DMA have an advantage over the current system?

Order execution of orders pre DMA was quite lengthy and required for a lot of motor skills among dealers and sales traders. Once the institution calls the broker for placing an order, the broker has to manually place the order into the trading system of the stock exchange through his trading terminal. DMA gets rid of such intermediate steps and allows the FPI sitting in Hong Kong or Singapore to directly place orders on the NSE or the BSE by riding on the broker’s DMA system. Of course, in this case, the onus of proper execution is on the FPI client since the broker has no control over the orders. That is one of the reasons; many FPIs are still wary of DMA with outside brokers and use it more for interfacing with in-house brokers in India.

But, DMA is meant for institutions (MFs, FPIs, props)

DMA gives the advantage of speed and accurate execution. But this facility can be currently offered by brokers only to institutional clients such as mutual funds, insurance firms and foreign institutional investors. Under the DMA facility, brokers install trading terminals with direct access to the trading system of the stock exchange at the premises of the institutional investors. The beauty of the DMA system is that it can be used for placing orders without any further intervention by the broker. That’s why it is called DMA. This offers the following distinct merits to placing orders.

a) It provides direct control over orders to the institutional client. For example, it reduces the risk of wrong feeding of the order in the trading system by the broker.

b) Clients need not worry about bad execution, fat finger trades etc. The task of pressing the right key at the right time is now entirely in the hands of the institutional client.

c) DMA provides better execution of complex trading strategy. That is when DMA combines with algos and low latency.

d) Finally, risk of front-running by brokers is avoided. Broker would know which stocks you are currently picking or which stocks you are selling, only at the end of the day.