dma trading explanation and benefits

DMA Trading: Explanation and Benefits in Trading

Modern traders are hard to please. They are often tamped in trading, spoiled by technologies, and demanding trading conditions. They need:

  • flawless execution;
  • high fail-safety;
  • good spreads;
  • transparent pricing from a broker.

That is why it is so important for a broker to build a competent scheme of work with client orders. He needs to choose reliable liquidity providers. In this context, DMA liquidity gives a broker an advantage. It will help him fend off competitors and win clients’ trust. In this article, we will learn more about this new technology. We will also reveal all the advantages of this method. Read on to become the most savvy trader.

understanding dma

It is a term used in financial markets to refer to electronic trading. It allows investors to deal directly with the exchange stack. So the DMA meaning is not so complicatied.

Remember that besides “discretionary” orders, “non-discretionary” orders need minimal attention. The trader just has to look at the order from the client if it is:

  • received electronically;
  • already on the computer. 

Then a trader checks the order parameters and presses the “send to market” button.

But why not program the computer to:

  • perform certain checks;
  • send the order to the exchange without involving the trader automatically?

This idea came in the early 2000s when exchanges became electronic everywhere. And brokers began offering their clients DMA service.

DMA provides direct market access without the intervention of brokers. This means all traders’ trades are often hedged, minimizing the players’ risks. This type of trading is becoming increasingly popular in the market.

DMA trading of CFD instruments allows using leverage. Without DMA, traders can only buy stocks at a set price. But they can set the price at their discretion with direct access to the market.

Benefits of DMA

benefits of dma

The main benefit is that all orders are always sent directly to liquidity providers. Orders who know DMA meaning are directly sent to the exchange. They bypass the brokerage company and increase the speed of transaction execution. Thus, traders get the most transparent execution at the best market price. They do it according to the Best Bid – Best Ask principle. Each order enters the “stack” of prices of the liquidity provider and “creates the market”.

Traders like brokers with DMA liquidity for the following reasons:

  • For high transparency of trades and guarantee of market execution;
  • For the best prices from multiple liquidity providers;
  • For opening trades bypassing the intermediary;
  • No requotes;
  • Non-fixed spreads without markups;
  • For the possibility to use any trading style (scalping, trading on news, long-term trading, etc.).

In turn, DMA trading attracts brokers for the following reasons:

  • High resiliency due to aggregated liquidity from multiple providers.
  • Competitive advantages due to shorter order execution time and lower transaction costs.
  • Single margin account – no need to open accounts with each liquidity provider.
  • Predictable and stable cash flows. The broker receives money regardless of whether traders earn or lose.
  • Minimization of risks.
  • Absence of conflict of interests and, as a result, loyalty and trust of traders.

Below you can read more about all of the DMA benefits.

Access to Multiple Markets

One primary DMA benefit is interacting directly with financial markets. This opportunity works both for traders and investors. Through DMA, participants gain seamless and immediate access to:

  • real-time prices;
  • liquidity;
  • order books without the need for intermediaries such as brokers or dealers. 

This direct access empowers market participants with greater control over their trades. It enables them to execute orders quickly and efficiently. Also, it allows traders to capitalize on market opportunities promptly.

Foreign Exchange (Forex) Market

Participants gain direct entry into the global Forex Market. Owing to the direct access, they go without intermediaries and brokerages. In the end, they get more efficient trading execution and potential cost savings. Direct market access platforms provide:

  • faster order processing;
  • reduced latency;
  • potentially more favorable pricing.

This is because of the direct connection to major currency pairs. Which is a critical factor in a rapidly changing currency environment. You will appreciate this advantage during significant world events or volatile market conditions.

Futures Market

DMA’s special accessibility to the futures market gives traders a couple more advantages. They can deal directly with a variety of futures contracts including:

  • commodities;
  • stock indices;
  • interest rates and currencies. 

DMA increases transparency, speed, and control over trades. It eliminates intermediaries and routes orders to exchanges. This direct market access allows market participants to capitalize on real-time opportunities. They can capitalize on price movements and manage risk effectively.

Options Market

Investors can interact directly with the options market. This is also a pro of DMA trading. After all, it allows them to buy or sell option contracts without the involvement of dealers. This direct approach has the following advantages:

  • greater flexibility in implementing trading strategies;
  • faster order processing;
  • investors can make more strategic decisions in options trading. 

Real-time access to the options market allows investors to react to market fluctuations. They can also adjust positions and optimize risk exposure. In the future, this will increase their ability to adapt their investment approaches.

Faster Order Execution

The elimination of the intermediary broker is also an important DMA benefit. It facilitates faster order execution. Traders no longer have to wait for their orders to move from broker to liquidity provider. Instead, they will receive them executed directly and immediately. 

The short trading process increases the speed at which trades get executed. Traders who make large financial transactions get more advantages. Since they can execute multiple trades on a daily basis.

Lower Costs

Another advantage of DMA trading is its efficiency. Traders also do not have to pay commissions to their brokers. Because brokers can make a small profit from markups on their spreads. Also, these spreads are usually fixed. 

As a rule, traders or investors have had to pay a commission to a broker for the use of their services. The fees are for investment advice or to fulfill orders to sell or buy currencies. These fees are no longer necessary to use direct market access.

Direct Access to Order Books

Participation in auctions is also a benefit of the direct market access platforms. Traders and individual investors can take part in opening and closing auctions. The highest or lowest prices are set at these auctions. 

Direct access to order books via DMA allows traders to:

  • determine market sentiment;
  • identify potential support and resistance levels;
  • accurately assess the market situation. 

This feature also provides valuable insights into market depth and liquidity. So traders see available prices and order sizes.

Real-time Market Data

DMA provides traders access to real-time market depth. Because it shows the full range of buy and sell orders. This level of transparency enables traders to make more informed decisions. Simply because it is easy for people to get a particular asset’s demand and supply dynamics. Traders and brokers with direct market access can:

  • gauge the market sentiment;
  • identify potential support and resistance levels;
  • plan their trades accordingly. 

All this leads to more accurate order placement and improved risk management strategies.

Reduced Market Impact

DMA can help reduce market impact when executing large orders. Traders can split their large orders into smaller, more manageable pieces. It will cut the impact of their trades on the market. This can be particularly beneficial in highly liquid and sensitive markets. As big orders can move prices significantly there. Through DMA, traders can execute trades with greater discretion. They can also avoid potential slippage. So their trading activities do not disrupt the market’s natural price equilibrium.

Private Investor Information Remains Confidential

One of the problems was that confidential data could leak. Traders face that a name, address, and bank account number can go to another person. But, this direct access to the market minimizes the risk as no third-party involvement exists. This is one of the most important DMA benefits.

Private traders or investors use the DMA provider’s credentials instead of their own. This level of security also protects traders from cybercrime. As it has risen dramatically in the previous years.

Difference Between DMA and Brokers

Traditional brokers act as intermediaries between traders and the financial markets. When a trader places an order with a broker, the broker executes the trade on their behalf by accessing the market on the trader’s behalf. Brokers provide convenience and support. They still may introduce a slight delay in executing orders. It happens due to the intermediary role, resulting in:

  • potential slippage;
  • higher trading costs.

On a direct market access account, brokers do not perform any actions. Only redirects clients’ orders directly to liquidity providers. They will be executed at the best available price there (+ a small fixed markup from the broker).

This is done with market execution, ensuring that all orders are executed at the best bid. But since DMA technology always works only with traded prices, there will be no requotes. The trade is always opened and closed at the trader’s click. Prices in DMA trading are transmitted directly from liquidity providers to traders. This ensures that there are no re-quotes or price deviations.

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Direct market access is crucial for traders as it provides faster and more efficient order execution, reducing latency and enhancing trading opportunities.

Obtain direct market access through brokerage firms or financial institutions that offer DMA services as part of their trading platforms.

Potential drawbacks include increased risk due to faster execution. Also, it can be because of the need for sophisticated trading strategies. And we do not forget about the possibility of unfiltered market data exposing traders to certain risks.

It allows investors to bypass intermediaries, such as market makers, and place orders directly on the exchange. This direct access offers greater transparency, faster order execution, and the ability to interact with the order book, providing traders with more control over their trades and potentially reducing trading costs.

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