ES03-011

As buy-side traders have taken greater control of their trading and execution management in recent years, they have been presented with a plethora of technology tools designed to help make informed decisions and execute effectively.   Accordingly, the buy side has pressed sell-side brokers to supply more technology to enable it to use these tools in a manner that is as efficient as possible.   More informed trading decisions, broader market access, and faster execution speeds bring the buy-side traders as close to their sell-side counterparts as possible, and with every new advance in trading technology, the buy-side clamors for more.   As a result, direct market access (DMA) has exploded into the mainstream, from nascent stage to "must have" in just a few years.

The rapid acceptance of DMA reflects the industry's desire for bigger, faster, and better trading technology. Whether it is research, analytics, algorithms, or market access, buy-side traders are behaving more like their sell-side counterparts than ever before and have raised their expectations of trading technology. This inclination has become so evident that broker/dealers have hastily snapped up the leading independent DMA platforms to integrate these systems into their offering suite while leveraging DMA's popularity to bolster their overall business model.   As a result, DMA is now commonplace on most equity trading desktops.   However, while DMA has moved beyond the "tipping point" where deployment is widespread, its value proposition is being questioned by buy-side and sell-side firms alike.  

The sweeping merger and acquisition activity occurring in the US equity markets is a major issue severely impacting DMA systems.   The consolidation of the equity markets has caused DMA's value as liquidity aggregator to wane as the need to amass fragmented trading opportunities has lessened. However, traders are demanding greater value from their technology and providers find themselves reaching to extend DMA's significance.   One of the strategies providers are considering to enhance DMA's value beyond simple connectivity is positioning DMA as a vehicle for delivering execution management or an integrated platform of more sophisticated execution technologies creating greater buy-side value.  

Is DMA in the early stages of growth or is the uncertainty of its value an indication that DMA has an unsure future?   The answer likely lies in DMA's ability to adapt to the dynamic marketplace and co-exist with the other complex electronic trading tools that traders rely on. As the markets grow more complicated and profits more elusive, increased dependence on automated tools becomes more a matter of survival. Traders seeking improved capabilities will leap at the opportunity to use these tools in a well-integrated manner. One key measure of trading automation performance is the ability of the plethora of advanced trading tools to seamlessly interact so that traders can optimize their use. This factor is already driving DMA providers to alter its value proposition to focus on the linkage of their platforms with algorithms, analytics and other related technologies, rather than on its connectivity, routing or payment features.

If the buy-side is to recognize value in DMA, it remains to be seen how well it will accept it from broker/dealers, who are increasingly viewed as competitors rather than trusted advisors.   Nearly all mutual funds and hedge funds are reducing their brokerage relationships and have openly endorsed independent trading platforms over broker-operated ones recently.   Given that broker/dealers own the largest DMA platforms, the growth of the technology may rest on their ability to gain a greater level of confidence as providers of technology to the buy-side, which now has fewer choices to acquire DMA capabilities outside of sell-side institutions.

A copy of this report is available at www.tabbgroup.com/research.

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