DIRECT MARKET ACCESS

What is Direct Market Access?

A description of DMA and how it could benefit you.

The Equitrade DMA Platforms

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DMA Trading - The basics

A brief introduction to DMA trading

DMA Strategies

Some of the methods used to profit from DMA.

Level 2 Dealing Platform

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• Place orders directly in the market

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Direct Market Access, or often referred to as Level 2 is a method by which orders are placed directly into the market in the form of a bid or offer to create a market price.

Level 1 dealing is the method by which traders will buy at the current market bid or offer depending on the size of the trade.  In normal circumstances, if the quote of a share for example was 523-525, and you were looking to buy, you would expect to pay 525, or the offer price.  Equally, if you were looking to sell, you would expect to receive 523, or the bid price.  On a DMA platform, this bid and offer spread is often referred to as the 'touch price' or 'touch strip'.  

When you hear your brokers talk about 'best execution' they are normally referring to the 'touch price' as the quote you should expect to receive. In most cases dealing at the 'touch price' is not a problem, but there are occasions when the size you are dealing in may be too high for the 'touch price' to be guaranteed.  Don't be put off by this, it is a fairly normal part of dealing procedures and was put in place by the LSE to protect market makers (originally) from having to make prices in quantities that simply were not tradable at that price.

Level 2 dealing (or Direct Market Access) allows YOU to make the market price.  If that seems strange, then to most of you it probably is, but basically it is a system based on the simple premise that for EVERY SELLER, THERE HAS TO BE A BUYER.  When you sell at the bid price, in the case above of 523, it had to be sold to someone.  That person must have been a happy buyer and therefore put a bid for the stock in at 523 (ahead of those lower than him).  In doing so, the seller and the buyer have created a market in much the same way as one would find at a car auction for example.  The starting price is low, the seller wants a high price, the price rises as buyers out bid each other, until finally a bargain is struck and the item is sold.

To illustrate this, lets take the above example.  If the market quote ('touch') is 523-525, it means that the most you can sell the stock for is 523 , equally it is the least a Level 2 buyer of the stock will get his stock for.  Lets say, another buyer came along and decided they did not want to trade on Level 1 and buy at the market price of 525 but instead wanted to try their luck by placing an order on Level 2.  They could therefore put a buy order on at 524 and by outbidding the previous 523 buyer, tighten the spread to just 1p.  This would then make the market 'touch price; 524-525.  You have created the market price, rather than paying it.  The main point to consider however, is that of there is always a risk that your order will not get filled.  Lets say the person on at 525 (i.e looking to sell) sees the 524 bid suddenly come in and thinks therefore that the price is rising because of heightened demand.  They might take their order off and it would make the 'touch price' jump to the next offer, which might be 526.  The new 'touch price' would therefore be 524-526.  By placing your order on, you may have just moved the price higher.

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