What is Direct Market Access?

In the UK, Direct Market Access or Level II (L2) dealing came about after the London Stock Exchange (LSE) introduced SETS, or the Stock Exchange Electronic Trading System in 1995.  Prior to that all FTSE 100 stocks had been traded using SEAQ, better know as the ‘Market Maker’ system which as the name implied, relied on Market Makers to quote two way prices and provide a liquid market for the buying and selling of equities.  The SETS system changed all that and came at a time when the internet and technology boom was spreading its wings to the man on the street, giving him greater access to market news, prices and dealing capabilities. 

The SETS system effectively automated the process by which prices were made so that it could be done electronically.  The system made the whole process far more transparent (whether a good thing or not is open to question) and allowed market participants to clearly see everybody’s bid and offer prices.  At first the ability to enter trades on SETS was only made available to professional parties but quickly, as the technology became available, was rolled out to all market participants including those companies and brokers acting on behalf of individual retail clients.  This meant that an individual could now get their broker to enter their order directly on SETS allowing them to directly have an impact on the share price, its liquidity and even its direction. …effectively it allowed the man on the street to become a market maker, but more importantly added a new dimension to price making in UK equities that would change for ever.

The next major step occurred when Direct Access systems were made available to all and coincided with the ‘tech boom’ witnessed in 1999-2001.  Various factors conspired to produce this shift, but it was in large part due to the incredible gains that some of the new internet stocks were experiencing at that time.  The bubble was growing and people once again came back to the equity markets in their droves as the prospect of incredible double and sometime triple digit gains revived interest in growth stocks.  It did unfortunately, as time has shown often does, come to a rather rapid and gruesome end when in 2001 the technology bubble finally burst and people suddenly found that the stellar rises they has witnessed over the previous two years were in many cases simply built on sand.  As markets started their bear run (it was going to be three consecutive yearly falls for the UK) investors became increasingly disgruntled with the performances of their investment funds and more pertinently their investment managers.  The previous ‘golden children’ of the fund management community who had successfully capitalised on the above average returns from the tech boom, suddenly founds themselves in the cold as the words “tech fund” and “growth stocks” were deleted from the vocabulary.  With pension portfolios and managed investments seemingly decimated, the investor finally decided to take matters into his own hands! 

It was around about this time that trading instruments such as Contracts for Difference and Spread-bets started to become immensely popular.  This book will not attempt to delve into the finer nuances of how each of these products operate, many books have been written on this subject so it is probably better to let more comprehensive works cover the subject.  However, we can settle ourselves with knowledge that the reason these products became so popular during this period of market gloom was that is gave the private investor the ability to go ‘short’ or the ability to profit from markets when they fall as well as rise.  Of secondary importance at the time, bit of more importance now, is that by their very nature they are a ‘geared product’ and therefore allow the trader to leverage a position to gains greater exposure to the market than would normally be the case.

As more and more investors saw the opportunity to make profits from price falls as well as rises and finally take control of their own portfolios, the market for Contracts for Difference and Spread-betting grew swiftly.  Although having been available for nearly ten years to mainly institutional clients, CFD’s grew to represent over 40% of all volume in the FTSE 100 as opposed to only 10% three years before.  Now at this stage the information and technology available to the private investor was on a par with their professional counterparts and, for the first time ever, the private investor could trade on a level and equal playing field. 

It was therefore probably an inevitable consequence of all this change that the private investor evolved and gave birth to a new and growing breed, the self made professional trader!  Ten years ago it would have been almost unheard of for a person, on perhaps thirty to forty thousand a year to conceivably give up their job and throw it all in, in search of that far more glamorous and potentially lucrative job, that of market trader.  The CFD companies in particular rewarded these people with greater technology that allowed them to deal faster, more efficiently and in greater numbers than had previously been available, making them, in theory at least, as competitive as their professional counterparts.  This was done with the introduction of Level 2 dealing (L2) first by companies such as GNI Ltd and now by IG Markets, which allowed the private trader to place orders directly into the market themselves from the privacy of their own home and without even having to pick up a phone.  Their orders could sit alongside those of institutional traders, brokers or even just the small longer term investor, without having to worry about the administrative implications of having to ‘settle’ a share transaction, convert the shares into a CFD, or worry about regulatory concerns such as capital adequacy. 

The greater information flow, the advanced technology and the ability for private traders to enter trades directly was certainly a massive leap forward in allowing us all to compete on a level playing field, but with one small problem.  The simple truth is that having the greatest technology and systems in the world is not enough if the person using it does not know how to use it as effectively as those he is competing against.  In essence it all comes back to the original premise that dealing in the markets, whether professional versus professional or private trader versus private trader, is all a competition! Level II dealing provides another weapon in the armourery and for some such as ‘scalpers’ it is the most vital weapon.  Either way it is something all professional traders should certainly know about, know how to use and be aware of the impact it can have on short term price movements.

Click below for more on Direct Market Access CFD Trading:

The DMA Quote Screen

Warning: Trading Contracts for Differences (CFDs), Futures and spread betting carries a high level of risk to your capital, and is not suitable for all investors. Only speculate with money you can afford to lose. Trading or placing any bets can result in consumers incurring liabilities in excess of their initial stake. Please ensure you fully understand the risks, and seek independent advice if necessary.  Equitrade CFDs is a trading name of Equitrade Markets Ltd, a company authorised by the FSA to provide advice on spread betting, CFDs, futures. options and rolling spot foreign exchange.

CFD Advisory Services - Execution Only Dealing - Open an Account - Research - Job Opportunities - Corporate Services