Direct Access Trading

“Investor Jim, can you tell me what direct access trading is and what I need to know about it?”
-Dan

Dan,
Direct access trading, as the name implies, eliminates the need of consulting stock brokers by allowing stock traders to trade directly with market experts. This type of trading system involves the use of front-end trading programs and express computer links to stock exchanges. Examples of these exchanges are NYSE, NASDAQ and the different ECNs (Electronic Communication Networks). The transactions involved in this type of trading are carried out in less than a second and their confirmations are shown on the computer screen of the trader almost instantly. This is quite the opposite of the standard online trader who necessitates a matter of seconds or minutes to carry out a trade.

Regarding commissions, direct access companies would charge traders based on the amount of trades executed, normally in terms of calendar months. Basically, this means that the more trades you make, the cheaper you get. Furthermore, unlike the standard online firms, direct access firms commonly bypass the exchange fees required in trades such as ECN fees, clearing fees, specialist fees, regulatory fees, etc.

Some direct access firms do not levy software fees on customers. Rather, they offer a lower-end trading platform that comes with fewer features in order to cut down their payables. More complicated trading systems are also offered as an upgrade alternative, but you would be charged fees monthly.
   

Normally, there are 2 types of minimums for opening a direct access account: balance minimums and activity minimums. According the to US convention, the former requires more deposits if the trader is involved in pattern day trading.
   

Direct access trading is mainly for active and independent traders who wish to cut down on slippage and costs, and regard fast execution of trades. This type of trading allows them to make their own decisions since the need for consultants or mentors is eliminated. The people who are normally the ones involved in this type of trading are scalpers, day traders, event-based traders and technical-based traders.
   

Scalpers are traders who trade in huge amounts for small profits. Hence, they need to carry out their transactions quickly because slow execution may thwart profits, and even suffer financial losses. Day traders are those who trade lots every trading day. Direct access firms can provide them big discounts on fees and commissions and even supply them with platforms. Event-based traders, also called momentum traders, make decisions to trade depending on the news and happenings that occur during normal trading days. The market will normally grow very unstable when the news breaks out. Hence, they would require lightning-fast execution to take hold of prospects. On the other hand, technical-based traders, also called swing traders or day traders, trade on stocks with high momentum and volatility. They need their instructions carried out in a split-second. In the same way, they must have the ability to quickly get out if market conditions suddenly go against them.