Going Direct
That's exactly what the buy side seems to be doing. Automated or program trading accounted for almost 60 percent of the volume on the NYSE in early July. And, according to Larry Tabb, more than 47 percent of buy-side firms have some type of connectivity to direct-market access.
Liquidity, Cost and Speed
One of the biggest drivers of direct-market access adoption is fragmented liquidity. Liquidity is spread across different pools; direct-market access technology provides an integrated view of that fragmented market, Tabb says.
But liquidity and DMA technology go together for another reason. Mike Plunkett, president of Instinet's North American division, says DMA is growing more important for trading strategies, especially for those stocks that are highly liquid. Rather than routing those orders through a broker for execution, he says, buy-side firms can do it themselves. "Direct-market access is becoming more and more the primary choice for the buy side. It's a more cost-effective way of executing," he explains.
Tabb says that the need for faster executions is driving firms into the DMA camp. "The market is speeding up," he observes, and the buy side needs to keep up to compete.
The number of brokers that a buy-side firm uses is declining, Tabb continues. But firms still average between 28 and 52 brokers, depending on the buy-side firm's size. So expect to see DMA platforms offer more multi-broker functionality, he says.
Carey Pack, president of BNY Brokerage, which purchased Sonic, says that's one of the things his firm is considering. "We want to be able to allow our clients to use the platform in a multi-broker fashion." His firm's integration of Sonic's direct-access platform with BNY trading tools through the launch of DEx is the start of that and a reflection of the trend to provide buy-side firms with more control, he says. "Buy-side clients want more control over trading and order flow and anonymity. They want to make sure their orders aren't conflicted and the information doesn't leak and cause them harm in terms of performance."
FlexTrade Systems of Great Neck, N.Y., is touting its FlexDMA offering - a comprehensive array of direct market access servers - to sell-side firms as a means for the sell side to provide better services to buy-side institutions. FlexDMA provides configurable internal and external routing, comprehensive pre- and post-trade analysis and smart order routing.
Go to the Head of the (Asset) Class
As DMA adoption increases, DMA technology is expanding well beyond the equity markets into other asset classes. Celent's Burns says buy-side firms "want to trade multiple assets classes in one platform." As a result, technology vendors are building DMA connections to options, futures, foreign exchange and fixed income markets.
For example, Lava's Korhammer says his firm plans to launch a foreign-exchange platform to complement its equities offering. "We anticipate over time entering into new security classes," he notes.
Regulatory issues also may drive the growth of DMA. Soft dollars are under attack, and some fund companies have done away with them, notes David Sher, senior managing director at Electronic Specialist, an institutional brokerage that provides direct-access and trading solutions to broker-dealers and institutional investors. Firms are demanding that pricing be unbundled so they know how much they are paying for research. Additionally, the fair disclosure rule, which requires equal distribution of research, has lowered the value of research, Sher says. Once firms better understand their execution and research costs, direct-market access will be more attractive, he predicts.
Furthermore, Regulation NMS is likely to spark DMA growth as exchanges race to become fast markets and offer automated quotes and executions. Reg NMS seeks to establish a uniform trade-through rule for all market centers, affirming that price priority is fundamental. It would also establish a uniform market-access rule to help ensure non-discriminatory access to the best prices displayed by market centers.
Instinet's Plunkett says the NYSE could be a catalyst to adoption of DMA. "If the NYSE was to get up to speed with the rest of the community and have automated executions, you would see that market change over night."
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