Direct Market Access
A Wealth of Knowledge
Direct market access or DMA, is a model used in electronic trading that give traders and investors a way to interact with the order book of an exchange or in the case of Forex, where there is no central exchange, Direct Market Access refers to Forex Traders and investors having Direct Market Access to the Forex Interbank Market. Using DMA, investment companies (also known as buy side firms) and other private traders utilize the IT infrastructure of sell side firms such as investment banks and the market access that those firms have, but control the way a trading transaction is managed themselves rather than passing the order over to the broker's own in-house traders for execution.This is the future of trading because the broker has no control or power to manipulate the prices or mark up the spread as there is no dealing desk. Direct Market Access brokers like TDMarkets.com will charge a small commission for their services. This is the only model that is fair and ECN is a popular example of Direct Market Access. Any model that requires the orders to be routed via the broker will be open to manipulation and now days all STP brokers have given in to the temptation of running a B book and trading against their clients. This is not possible with a Direct Market Access broker model and as such there is no conflict of interest between Forex trader and Forex broker.
How can I identify a DMA or ECN broker? The Market Maker Brokers will have no clients if they admitted their underhanded tactics so they lie. They claim to be ECN or other Direct Market Access models and will go to great lengths to fool their unsuspecting clients. Many brokers that charge commission are only doing so to uphold the appearance of being a DMA broker. Use the following points and never get fooled again!
Your real DMA brokers will often have extentions like .ECN or .DMA after their symbols, for example EUR/USD.DMA or GBP/USD.ECN. This is to help identify their orders in the Interbank Market.
Real DMA brokers can't modify the spread as there is no dealing desk so your spread has to be raw Interbank spreads. Interbank spreads are always variable and not fixed because it depends on depth of liquidity and volatility of price at any given time. Spreads on EUR/USD should be between 1.2 pips and 2.6 pips for 90% of the time. Lower or higher spreads on EUR/USD will mean that the spread has been modified and this would serve as proof that a dealing desk is present and that the broker is not a Direct Market Access broker.
Direct Market Access brokers do not re-quote. The spread you pay is there to protect against price fluctuations so under normal trading conditions you should get instant execution without any re-quotes.
Direct Market Access will not allow you to enter a trade at your chosen price during times of extreme volatility like NFP for example. If you are able to enter a trade during the spike of NFP and get your requested price then this is a tell tale sign of a market maker broker.
You can not have months of profitable trading with market makers because they will intervene and manipulate prices against you. If you have 6 months or so of profitable trades then you are with a DMA broker. If you are unable to get 6 profitable months in a row then either your broker is a market maker or you are not a very good trader. This rule for spotting the enemy has never failed me.