Traders who are seeking fast transactions without the high costs that come with executing those trades would do well to explore direct access trading as a viable solution. Direct access brokers specialize in providing users with the ability to trade directly with the market and circumvent the traditional brokerage avenues that are typically relied upon for the purposes of executing orders.
But direct access trading doesn't completely cut the broker out of the process. A broker still has the opportunity to profit from these types of transactions by providing users with a trading platform designed for this method of order execution and taking a small fee for each order completed by way of that system.
How Direct Access Trading Works
Traders who wish to participate in direct access trading search out special brokerage firms that are provide a point of access that emphasizes speed and meticulous order execution on assets such as stocks or currency. These trades are made through a direct link to the market by way of an electronic communication network or ECN. Some brokerages may also offer additional points of access in the form of exchanges or liquidity providers.
In every instance, the brokers offer these unique trading platforms that are much quicker and don't come with the additional costs of a broker's assistance. The brokerage was simply a middleman in this equation but traders who had to act fast to take advantage of a particularly good stock price would sometimes find themselves at a disadvantage by having a broker execute an order.
That extra step in the process of relying on someone else to perform the transaction often hindered the order's timely execution and he or she would miss out on buying or selling that asset at a much better price. Traders started getting annoyed by losing out on a great opportunity due to the inherent delays of placing orders through a brokerage.
But with direct access trading, those small windows of opportunity need not be shut simply because of the broker's delay. Now the trader can go directly to the market and execute the trade. But the broker is still part of the process, just in a much different capacity. Brokerages who work with direct access trading are the conduits to that access and they still get a cut of every order transacted through their access point.
Now traders only need a laptop, tablet, or smartphone, a fast internet connection, and a direct access trading platform through which to manage their own orders, without worrying about any impediments on the part of their broker. But even more beneficial is the ability for traders to receive Level II information that allows for updated quotes on stocks and other assets.
This gives traders more information upon which to make an informed decision about whether to buy or sell a commodity. Direct access trading even lets traders see other traders' orders on any particular stock or asset.
So What's the Hold Up?
If conventional brokers are so in tune with the speed and volatility of the market, how come more traders are seeking out ways to avoid using them when time is of the essence? Brokerage firms know that stock prices can fluctuate quickly and their clients sometimes need to make snap decisions.
The main problem with these types of brokers is that trade orders go through extra channels that can slow down their timely execution and that means customers may sometimes suffer as a result. In these larger online firms, a customer places a trade order which is sent to a centralized trading desk. From there, the order is then forwarded to the brokerage's internal liquidity providers or outside market makers with whom the firm has established order processing arrangements.
It may not seem like it, but that's a somewhat more complicated network of participants needed to execute a trade. Furthermore, these traditional online brokers are geared towards providing their clients with information, analysis, and tools for strategizing trades instead of executing those trades.
So there are a number of reasons why delays might occur and leave clients wishing there were a much faster, more direct method for accessing the market.
Reasons to Choose Direct Access Trading
Traders who are looking to execute orders quickly without high transaction costs should try to go with this far more direct approach to trading. Those who perform a higher volume of trades and rely on algorithmic information would do well to go with direct access so they can enjoy fast order executions through a wide variety of market makers such as ECN's, broker-dealer networks, exchanges, and so on .
Online brokers who provide direct access trading services offer their clients multiple advantages beyond fast execution and fewer participants in the order routing process. The fees are less in that brokers only get a price per transaction.
These reduced commissions are a result of the brokers no longer being relied upon to manage orders, they merely serve as a means toward accessing the market. This is done mainly through technology which direct access trading brokers provide to their clientele. Since the brokers aren't doing the heavy lifting of getting involved in a transaction, they are entitled to a smaller commission.
Many of them will send rebates directly back to traders when they offer liquidity. Traditional online brokers might not be so forthcoming in such situations.
Now, the control is placed in the hands of the trader who acts as quickly or deliberately as he or she wishes, giving them a greater ability to benefit from liquidity and stock prices opportunities before they slip away. In many cases, the trader may not be sure how they plan to execute a trade, be it through an ECN, a market maker, a dark pool, etc. Direct access trading platforms can search for the best option and present it to the client, making the execution a greater success.