What is DMA? - Definition
Electronic trading has revolutionized how we trade stocks, bonds, currencies, and other financial instruments. By combining the power of computer systems and mathematical algorithms, buyers can instantly match orders with sellers on various markets across multiple continents. As electronic trading became more widespread, different infrastructure types emerged to facilitate quick order processing for efficient execution.
There are currently many types of infrastructure providing access to electronic trading, each with advantages and disadvantages. However, one can single out the type that simplifies exchange access because the order is placed directly in the exchange trading system, bypassing the broker's trading system, allowing the time of order delivery to the exchange and receiving information about its condition to be significantly reduced. This type of electronic trading infrastructure in the financial markets is called Direct Market Access or DMA.
This article will explain what direct market access technology is and what benefits it has. You will also learn what types of direct market access technology exist and at the end we will touch on the technical component and explain how the technology works using different protocols.
What is DMA and How Does It Work?
Direct Market Access is a technology of high-speed access to the financial market, be it crypto, Forex, or any other market, in which all exchange orders are received directly by liquidity providers, without any intermediaries. All this allows to significantly reduce the time of order delivery to the exchange and obtaining information about its status.
DMA technology is widely known among traders and features advantages such as heightened transaction speed, total transparency in execution, and unbeatable market prices. Every order submitted through direct access goes into the order book of prices directly from the liquidity provider, thereby generating market activity.
Taking into consideration the foregoing, DMA liquidity provides the broker with a considerable advantage to resist the competition and gain the clients' confidence. Such brokers are very much demanded by the majority of traders as they provide high transparency and guaranteed market deals execution, demonstrate acceptable prices from liquidity providers, and exclude intermediaries in the service chain. When receiving direct access, spreads are minimal and requotes are a rare event in a trader's life, at the same time, there are no certain restrictions on the trading style. The trader gets the opportunity to trade using scalping, trading on the news, or using any other approach.
Advantages of DMA Technology
There are several reasons why a trader might choose to use DMA over alternative forms of order placement:
1. Low Commissions
When deciding on a product or service, the cost of commission fees is always an important factor to consider. This concern becomes especially critical in trading financial markets, as high commissions can significantly deplete your budget. It's essential to research different providers and compare their respective charges to find the most suitable option for you. Compared to other types of e-commerce infrastructure, DMA typically offers lower transaction costs because you only pay for the technology, rather than the normal order management and oversight duties that come with passing an order to a broker for execution.
As mentioned above, each of the existing technologies for placing orders on the exchange is a product that is far from perfect and has both its advantages and disadvantages in different aspects. After conducting a comparative analysis between all types, you can see that the DMA technology clearly stands out from the rest due to its unique characteristics that open up more opportunities for the trading process. The point is that when using this technology of direct access to financial markets, orders are processed directly by the sender, which gives him more control over the final execution of these orders and the ability to quickly use liquidity and price opportunities.
Security has always played and continues to play the most important role in relation to trading in the financial markets, since the safety of vital elements of the user interface, the exchange administration system, the technological components of the entire system as a whole help to prevent the theft of data and funds of traders. The use of DMA technology minimizes information leakage because trading is done anonymously using the identity of the DMA provider as a front. Direct market access systems are also typically protected from other outlets within the provider's organization by various data encryption systems and security protocols.
4. Speed of Execution
The speed of order execution is also a key factor in determining the convenience of trading in the market. Often, the faster the order execution speed, the faster the trading process and the more enjoyable the trading experience. Direct market access allows traders to "spread" the stock. This is facilitated by allowing your order to be entered into a "Level 2" order book, effectively eliminating the need to go through a broker or dealer.
Types of DMA
DMA technology is in high demand as a highly efficient way to access financial markets due to its many benefits. At the same time, this technology has 3 subtypes, which will be discussed below.
- Plain Vanilla DMA
Back in the day, most market making and client order execution was carried out by human traders. So-called "high touch" trading was often an opaque process, vulnerable to latency and susceptible to front-running. Since there was no way for buy-side clients to monitor how the broker desks dealt with their orders, there was always an element of mistrust and misjudgment. A typical high touch order flow involved buy-side orders being sent to sell-side dealers with a limit price range to work on. The sell-side trader would first try and cross an order with another client flow and then maybe cross it with their own book positions. If these approaches failed, the broker would try their best to slice-and-dice the order in the open market.
Unlike “high touch” orders, in the DMA service no one touches client orders, no one processes them, and no one checks them manually. Therefore, they are called "low touch". “Low” because some processing is still going on: the order goes through the order management system (OMS), where it is checked for validity (validation) and compliance with various limits and risks (risk checks). Only after that, the broker's OMS system sends an order to the exchange to the market connectivity module, which sends it to the exchange. All order checks take place in a fraction of a second, but nevertheless they contribute to the difference between the time the order arrives at the broker and the order arrives at the market.
As a rule, processing an order in an OMS system takes time, which significantly increases the time delay between the moment when the order was submitted and when the order appeared on the market. Even if the process takes 5-10 milliseconds, for some clients it is too long. For such clients, brokers offer a variant of the DMA service called "Low-latency DMA" (LLDMA). In this option, the client's order bypasses the broker's OMS and immediately enters the exchange connection module, which makes a minimum of checks and sends the order to the market. In this variant, latency can be about 100 microseconds, or even less. As an option, the broker can install co-location in the data center of the exchange, which will reduce latency even more due to a shorter network connection path.
- Naked DMA
Despite the fact that the latency was incredibly low when using the LLDMA type, it still caused inconvenience to many clients, so brokers took an even bolder step – the development and implementation of Naked DMA or sponsored DMA technology. In the case of “naked DMA”, the client connects to the exchange directly, creating his own infrastructure, and sends his orders from his trading system directly to the exchange, bypassing the broker’s infrastructure, but using his identifier (broker ID).
The broker ID is required by the client because only members of the exchange, which is the broker, can trade on the exchange, but not the client. All orders submitted by the client via “naked DMA” are sent on behalf of the broker (he acts as a “sponsor”, renting out his ID and his reputation) under the responsibility of the client. The broker receives information about the client's orders post factum in the form of a protocol (drop-copy) from the exchange. Such orders are called "zero-touch" because the broker does not process them at all.
Direct Market Access Technology: Varieties of Protocols and Connection Methods
Access to financial markets is carried out using different protocols. Which protocol to choose depends on the goals and objectives to be solved with a direct connection. Listed below are the different types of protocols used to gain direct access to various financial markets.
1) Financial Information eXchange (FIX)
FIX API or FIX protocol stands for Financial Information Exchange. This protocol was specifically designed for financial markets to transmit large volumes of information as quickly as possible. It is currently used by the vast majority of market participants to establish communication between computer systems and is, in fact, the standard for communication in the financial sector.
FIX API gives traders the ability to create their own trading systems, such as “black boxes” of algo trading, which are able to receive large amounts of information from many different sources and make trading decisions based on this information. Thanks to the aforementioned advantages of the FIX API, the process of receiving, analyzing information and placing orders on the market takes milliseconds (ms) or even less.
To compare: execution of trades in MetaTrader 4 takes at least 20-30 ms, usually even more. A Forex advisor which trades through the FIX API sees the market movement and places an order in 1-2 ms, and will always beat an MT4 advisor. According to MoneyWheel Research, with a delay of 30 ms the MT4 terminal will simply not see 60% of the quotes – these 60% quotes are bought out by high frequency traders who use the FIX API.
A FIX API enables individual traders to compete with institutional traders on the same level. They can create their own trading systems, which will receive data from one or more different brokers and can serve as a single trading interface for placing orders in multiple locations. This will definitely increase the efficiency of trading, because, for example, it is not necessary to load the interface of each platform separately and work with brokers individually.
2) FIX Adapted for STreaming (FAST)
FAST (FIX Adapted for Streaming) was developed by the FIX Protocol organization to bring the greater benefits of standardization to market data and deliver optimized performance for the exchange of electronic financial information. Built around a data compression algorithm, it significantly reduces bandwidth requirements and latency between sender and receiver. FAST works particularly well at improving performance during periods of peak message rates. While FAST has grown out of market data, it is applicable and can be used with all FIX messages to offer flexibility in the way that FIX data is formatted for transmission.
3) Plaza II
The Plaza II infrastructure is designed to connect the exchange's trading system (it is called Spectra) and the client software using the so-called Plaza II gateway – special software that receives and sends data using the appropriate protocol. The gateway is installed on a computer that must have a connection both to the corporate network of the exchange and to the network where the user's client application is located.
As a rule, traders install their servers either directly in the exchange's data center or locate them in the data centers of their brokers, who are connected to the exchange through dedicated communication channels – this allows them to save money while maintaining a high rate of data exchange.
The main method of distributing data on the Plaza II platform is replication – data is broadcast by the server to clients in push mode (i.e., the client does not explicitly request changes to the data). The data are broadcast as a sequence of changes in relational tables, i.e. replication data streams. The client software subscribes to the necessary data based on the thread name (the access rights to the specific data are also set at the thread level). A flow can be in several states, including snapshot acquisition (history of data changes), online mode (data update in real-time mode) and error mode (which means that for some reason the flow cannot be opened).
Direct Market Access is ideal for all types of trades. This is because direct market access software can place a large number of traders simultaneously with high speed and immediate execution. This, in turn, allows professional and private traders better control their trading activity. When choosing the perfect DMA Forex broker to fit your trading strategies, it's important to consider both the advantages and disadvantages of a broker's offerings and to find out how well they meet your trading needs.