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DMA and Exchanges

Maybe after MiFID we’ll need to change the way that we use English.  Why do we call off-exchange trading “Over The Counter”? (because we don’t think of on-exchange trading as being “under the counter”, do we).  Many of us would find it hard to explain the difference in English between a trade and a transaction – yet trade reporting and transaction reporting mean two totally different things.  And in London a trade done “on market” means “on exchange”.

Today in Europe, Direct Market Access generally means for a buy-side firm to go directly through a broker’s system to get to the “market” – the on-exchange trading system to which the broker subscribes.  So do we call DMA something different when the broker’s own system, and not an exchange, is the target market for the trade?

With brokers working on shared execution venues, such as Project Boat and Ch-X, and on their own proprietary internalisation platforms, buy-side firms are likely to need more direct access to marketplaces than ever before.

Likewise, we talk about an “exchange” as being “the market”.  The London Stock Exchange operates multiple markets – the Main Market, AIM, EUROSETS, etc – as does Deutsche Boerse, Euronext, etc.  An exchange is not necessarily a regulated market: the LSE Main Market is defined as a “regulated market” under MiFID, but AIM isn’t.  Post-MiFID, the Main Market will remain as a regulated market, because it is regulated by the national market regulator, whereas AIM would be classed as an MTF, because it is regulated by the London Stock Exchange itself.

Directly accessing a broker’s execution venue should be faster than going through the broker’s system to access an exchange’s systems, thereby offering potential advantages in reduced latency.  Reduced latency should attract order flow.


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