DMA brokers are relatively new, but in order to fully understand what they are, let’s first break down the acronym DMA: Direct Market Access.
Direct market access allows traders to place Buy or Sell orders directly with the exchange order book. Traditionally, direct trading with the help of the order book was available only for broker-dealers and market-makers, yet the DMA allows private organizations and investors to deal with it. This service is also available for some retail online brokers. Such services are called DMA brokers because they give you the opportunity to benefit from market book.
The classic method of transactions involves brokers obtaining quotes from market makers, after which the broker offers the best quotes, meaning one value prices at any given time. Next, the trader decides to accept the quotation or not.
As for DMA brokers, they allow traders to see different prices of different market orders, and based on this, place their own orders without involving intermediaries. This method of trading has many advantages.
What Makes DMA Brokers So Different?
Besides the description above that shows the DMA brokers as offering direct access to different markets, here are some more aspects that make their activity unique. You should note that these differences can be expressed as great advantages:
- Contrary to standard brokers, the absence of intermediaries allows traders to quickly perform transactional operations and reduce associated costs.
- DMA allows traders to better control their operations because instead of taking quotes from standard brokers, traders can submit their proposals and independently manage the transaction, eliminating the market-makers' spread.
- When dealing with DMA brokers, there is no specific commission.
- DMA brokers have a greater number of liquidity providers.
- Specific trading strategies applied with DMA provide traders with more opportunities to be successful on international financial markets, so traders of all types are welcome: scalpers, news traders, swing traders, position traders, etc.
- The absence of intermediaries means greater anonymity.
However, with DMA the price of the transaction, meaning the price at which the order is executed, is entirely dependent on market liquidity because to make the transaction it is necessary to wait until a counterparty offers a quote.
How Are These Brokers Compensated For Order Execution?
As mentioned above, there is no commission with DMA brokers, so what do they stand to gain? The spreads from DMA brokers remain low since they can get the best direct price quotes from the banks and other liquidity providers. So to make profits, DMA brokers will usually add small mark-ups to all of the spreads that they pass on from liquidity providers.
Also, some DMA brokers might require monthly volume fees, including inactivity fees according to investor trading volume. So, if you don't intend to trade often and with high volume, you can end up paying higher fees for the convenience of trading with the best price quotes and low spreads.
DMA technology became available to retail investors and traders quite recently and so many brokers still do not offer services of direct access to international financial markets. However, DMA is becoming more popular and is raising the standards of execution technology and trading quality as a whole. The DMA service is in demand especially on highly liquid markets where there are lots of buyers and sellers, and Forex is such a market with daily transactions worth more than $5 trillion.
Despite all of these conveniences, the savings made with DMA are relatively small and will be beneficial only to very active traders, so if you aren’t one of these, why not try an ECN broker.