What Is Direct Access Trading and Who Should Use It?

eOptionDirect Access Trading

The idea of cutting out the middleman has been around forever, but the ability to actually do so often lags behind demand. This has been the case with securities trading for so long that few even realize that it is now possible to handle trades directly. Knowledge of this ability is slowly but surely spreading, though, and now several people want to know how to cut brokerages out of the business.

Enter Direct Access Trading

According to Investopedia, direct access trading (DAT) is a system that allows for directly trading with other clients, floor specialists, and NASDAQ market makers without a broker’s interference. It might be expected that the sought-after benefit would be lower costs, but in reality, this isn’t why investors are interested in DAT. Instead, it’s all about speed.

Why Is Speed So Important?

Speed is crucial for certain day trading strategies. The fastest strategies rely on the ability to capitalize on market changes of only a few seconds long. Getting a trade order to a broker, who must then relay the information to his firm’s floor specialists, can take longer than the market change the day trader is trying to pin down. This makes it so the day trader must use a method that cuts one or more hops out of the communication loop.

Is It Always a Good Idea to Go for Speed?

For most people, who will hold stocks for years or even decades, the online brokerage is the best choice. It offers decently-fast trades at cheap prices, and doesn’t require investors to go into minutia, like which floor specialist actually executes their positions.

Those whose profits depend on pricing swings that are only a few seconds or a few minutes long, on the other hand, can’t afford to wait for a broker to get around to sending their trades in. Their trading volume also makes it so that the tiny differences between the prices offered by various floor specialists will quickly add up. For them, it’s definitely worth it to go with DAT to eliminate the vagaries inherent in dealing with brokers.

What about Cost?

Direct access trading often costs more than online brokerage services, so those who are most interested in lower commission fees should go with the brokerage. DAT only makes sense when its speed will result in enough profit to make up for the higher charges.

How to Direct Access Trade

Direct access trading is done online. It’s the connectivity of the internet that makes it possible for general investors, rather than those directly associated with the trading floor, to use the method. In order to get connected to those who can carry out DAT trades, investors have to run one of several approved programs. These programs offer the interface through which trades can be ordered.

It’s important to note that, despite the online component, DAT programs are not the same as online brokerages. Online brokerages can delay trades for times ranging from seconds to minutes as they batch trades and send them to their preferred floor specialists. With online brokerages, investors also have no control over which floor specialists are used. Therefore, in some situations the investor may not end up getting the best possible prices on the securities themselves.

DAT software programs are often keyed to work with particular exchanges. The first one that was authorized worked with NASDAQ, but now, the other exchanges have decided to go ahead and allow individuals to access DAT

What Does a DAT Interface Look Like?

Current interfaces are generally very basic, and just give the required stats and the minimum functionality needed to get the job done. This makes them look very technical, to the point that those new to the concept will likely find them intimidating. That said, they do work, and with a bit of study and practice, can be mastered to the point that the desired trading speed can be obtained. New investors should simply expect to need to devote a bit of extra time to the learning curve instead of jumping right in and get a good idea of what categories and formats can be found in various programs.

No matter what kind of trading an investor does, there is a modern option available. Carefully examine these options before choosing one. That way, the need for low cost and the need for speed can be properly balanced for a better opportunity to help achieve profitable trading.

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