Wallstyouth
Vice President
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Very informative article on DMA trading still very strong today this article is from 2005 but its still very accurate in today's markets.
Direct-Market-Access Trading
By Ivy Schmerken
Wall Street & Technology
February 04, 2005
The Issue Defined: The buy side is taking more control of its trading decisions while looking for faster, lower-cost and anonymous executions. Direct market access (DMA) tools permit buy-side traders to access liquidity pools and multiple execution venues directly, without intervention from a broker's trading desk.
Why It's Important: DMA has been rapidly adopted by institutional traders as a method to aggregate liquidity that is fragmented across U.S. execution venues. Buy-side customers, under regulatory pressure, are also seeking best execution and greater control over their trading strategies. With DMA, they are renting a broker's infrastructure and clearing via the broker, but they are controlling the order. The real motivation for aggressive DMA trading on the buy side is cheaper commissions - DMA commissions are about one cent a share, while program trades cost roughly two cents a share and block trades cost four cents to five cents per share.
Where the Industry Is Now: Thirty-three percent of buy-side equity shares are currently routed via DMA (as of 2004), and 38 percent of buy-side shares will be executed through DMA by 2008, estimates TowerGroup. Hedge funds are among the most aggressive users of DMA. With its popularity, a consolidation wave hit the DMA space as major broker-dealers acquired independent DMA vendors. In 2004, Banc of America Securities bought Direct Financial Access Corp.; BNY Brokerage purchased Sonic Financial Technologies; and Citigroup acquired Lava Trading. Now that DMA has become commoditized, bulge-bracket firms are focusing on algorithmic trading - a higher-level strategy - as part of a comprehensive set of services encompassing DMA, program trading and traditional block trading, and on transaction-cost analysis services that they are putting on top of the DMA pipe.
Focus in 2005: To differentiate their services, brokers are expanding their DMA coverage beyond equities into fixed-income and derivatives. The next frontier is expanding DMA activity into the international markets by extending connectivity into Europe and Asia/Pacific.
Who's Ahead: Goldman Sachs' REDIPlus, Morgan Stanley's Passport and CSFB's Pathfinder platforms offer global connectivity to equities, futures and options exchanges. Niche player NeoNet Securities offers direct access to European equity markets and to U.S. markets for European clients. Interactive Brokers (IB) is adding bond trading to its direct-access Universal platform and is using smart-routing technology to trade stocks, ETFs, options, futures and FX. Last year, Lava Trading launched a direct-access product for FX trading.
Vendors in Space: FlexTrade, Neovest, Portware, Townsend Analytics. Buy-side OMSs (Macgregor, Eze Castle and Linedata) and sell-side OMSs (SunGard Trading, royalblue).
Associated Costs: Building DMA trading capabilities from scratch could cost a broker-dealer about $15 million, estimates The Tabb Group. A large bulge-bracket firm may spend $50 million.
Industry Perspective: DMA "has been commoditized - there are 32 guys that provide it. There's only five or six that I would call industrial strength. I would say there isn't a lot of innovation left in DMA, whereas I would say there was a lot of innovation in DMA four or five years ago," says Rob Flatley, managing director, electronic trading services at Banc of America Securities. As DMA has matured, he continues, it has become "kind of a vertical service in a broker's horizontal platform. I think you'll see DMA evolve; and it's going to move in and it's going to compete with order management."
Direct-Market-Access Trading
By Ivy Schmerken
Wall Street & Technology
February 04, 2005
The Issue Defined: The buy side is taking more control of its trading decisions while looking for faster, lower-cost and anonymous executions. Direct market access (DMA) tools permit buy-side traders to access liquidity pools and multiple execution venues directly, without intervention from a broker's trading desk.
Why It's Important: DMA has been rapidly adopted by institutional traders as a method to aggregate liquidity that is fragmented across U.S. execution venues. Buy-side customers, under regulatory pressure, are also seeking best execution and greater control over their trading strategies. With DMA, they are renting a broker's infrastructure and clearing via the broker, but they are controlling the order. The real motivation for aggressive DMA trading on the buy side is cheaper commissions - DMA commissions are about one cent a share, while program trades cost roughly two cents a share and block trades cost four cents to five cents per share.
Where the Industry Is Now: Thirty-three percent of buy-side equity shares are currently routed via DMA (as of 2004), and 38 percent of buy-side shares will be executed through DMA by 2008, estimates TowerGroup. Hedge funds are among the most aggressive users of DMA. With its popularity, a consolidation wave hit the DMA space as major broker-dealers acquired independent DMA vendors. In 2004, Banc of America Securities bought Direct Financial Access Corp.; BNY Brokerage purchased Sonic Financial Technologies; and Citigroup acquired Lava Trading. Now that DMA has become commoditized, bulge-bracket firms are focusing on algorithmic trading - a higher-level strategy - as part of a comprehensive set of services encompassing DMA, program trading and traditional block trading, and on transaction-cost analysis services that they are putting on top of the DMA pipe.
Focus in 2005: To differentiate their services, brokers are expanding their DMA coverage beyond equities into fixed-income and derivatives. The next frontier is expanding DMA activity into the international markets by extending connectivity into Europe and Asia/Pacific.
Who's Ahead: Goldman Sachs' REDIPlus, Morgan Stanley's Passport and CSFB's Pathfinder platforms offer global connectivity to equities, futures and options exchanges. Niche player NeoNet Securities offers direct access to European equity markets and to U.S. markets for European clients. Interactive Brokers (IB) is adding bond trading to its direct-access Universal platform and is using smart-routing technology to trade stocks, ETFs, options, futures and FX. Last year, Lava Trading launched a direct-access product for FX trading.
Vendors in Space: FlexTrade, Neovest, Portware, Townsend Analytics. Buy-side OMSs (Macgregor, Eze Castle and Linedata) and sell-side OMSs (SunGard Trading, royalblue).
Associated Costs: Building DMA trading capabilities from scratch could cost a broker-dealer about $15 million, estimates The Tabb Group. A large bulge-bracket firm may spend $50 million.
Industry Perspective: DMA "has been commoditized - there are 32 guys that provide it. There's only five or six that I would call industrial strength. I would say there isn't a lot of innovation left in DMA, whereas I would say there was a lot of innovation in DMA four or five years ago," says Rob Flatley, managing director, electronic trading services at Banc of America Securities. As DMA has matured, he continues, it has become "kind of a vertical service in a broker's horizontal platform. I think you'll see DMA evolve; and it's going to move in and it's going to compete with order management."