Time was when trading at stock exchanges used to look like a shouting match in a fish market. Now all that remains is the click of the mouse, with very few face-to-face interactions with your broker. Things are bound to become even more user-friendly for institutional investors with the introduction of what we call direct market access. This was in the wish list of institutional investors for a long time. Now we have to just wait and see where this new-found glory ultimately takes us.
Johnny: As a curious member of the investment community, I should know about new things in the offing. Can you explain what direct market access is?
Jinny: Direct market access, or DMA, is a facility by which a client can directly place his orders in the trading system of a stock exchange. Such a facility has already been in existence in many international stock markets, but DMA is a new discovery for the Indian stock market. Before you understand how DMA works, you need to have some idea of how trading takes place in our stock exchanges.
Johnny: It would be better if you could explain that too.
Jinny: Trading of securities, just like that of any other good, can take place only when buyers are able to meet sellers on a common ground called the market. For trading of securities, we have designated places called stock exchanges where buyers are able to meet sellers. But in stock exchanges, buyers meet sellers only through a broker, who acts as an intermediary.
Earlier, all trading used to take place by physical interaction among brokers on the trading floor of stock exchanges. But things have changed now, with no need for face-to-face interaction. Our stock exchanges—National Stock Exchange and Bombay Stock Exchange—use electronic trading systems which automatically match the best buy order with the best sell order, without buyers and sellers or their brokers actually coming in contact with each other.
Johnny: Even big deals require no handshake. The electronic trading system has really changed the way we trade.
Jinny: Yes! The electronic trading system has brought many changes.
Once you call your broker for placing an order, your broker has to manually place your order into the trading system of the stock exchange through his trading terminal. If you are more of a “do-it-yourself” kind, then you can use the online trading facility provided by some brokers, in which case you place the order by accessing your broker’s website. Online trading may not involve any manual intervention by your broker, but before your order reaches the trading system of the stock exchange, it has to be validated by the online trading system of your broker.
In other words, even online trading requires some form of intervention by your broker at the end and hence it might take some time before your order is actually placed in the trading system of the stock exchange.
Johnny: What’s the way out if we wish to execute our trade in a split second?
Jinny: For that you need to have DMA. But this facility can be currently offered by brokers only to institutional clients such as mutual funds, insurance firms and foreign institutional investors. Under this facility, the brokers install trading terminals with direct access to the trading system of the stock exchange at the premises of the institutional investors; these can be used for placing orders without any further intervention by the broker. That’s why it is called DMA.
Johnny: What are the advantages of DMA?
Jinny: This facility has many advantages. Firstly, it provides direct control over your orders. For example, it reduces the risk of wrong feeding of the order in the trading system by your broker. There is no need to worry if your broker sometimes forgets to count zeros, the task of pressing the right key at the right time is now entirely in your hands.
Secondly, DMA provides better execution of your trading strategy. You would not find your broker running ahead of you to buy or sell when he comes to know about your big orders. In other words, DMA leaves no scope for what is called front-running. Your broker would, in fact, not even know which stocks you are currently picking or which stocks you are currently dumping.
Thirdly, DMA provides faster execution of orders. You are placing your order directly in the electronic trading system of the stock exchange; this curtails any loss of time in calling your broker. Better still, DMA also enables you to use what is called algorithm trading or program trading in which computer programs take decisions of buying and selling in split seconds without waiting for your command.
Institutional investors using program trading can take advantage of price discrepancies that last for only fractions of seconds. DMA might unleash the true power of computer programs.
Johnny: That would surely be something we need to watch out for. I just hope that new power doesn’t bring new troubles.
What: By using direct market access (DMA), institutional investors can directly place their orders in the trading systems of stock exchanges.
How: Under DMA, institutional clients using trading terminals with direct access to the trading system of stock exchanges will be able to place their orders.
Why: DMA is useful because it enables better control and orders can be executed without any loss of time.
Shailaja and Manoj K. Singh have important day jobs with an important bank. But Jinny and Johnny have plenty of time for your suggestions and ideas for their weekly chat. You can write to both of them at email@example.com