Market regulator SEBI has recently announced a new facility where Foreign Institutional Investors (FII) and domestic institutions such as mutual funds and insurance firms will be allowed to directly execute their buy and sell orders without any manual intervention by their brokers. Under this new facility, brokers will be able to offer their clients direct access to the stock exchanges through their own infrastructure. This facility has been termed as Direct Market Access and will bring in a number of advantages. For example, direct control of clients over orders, faster execution of client orders, reduced risk of errors associated with manual order entry, lower impact costs for large orders, better audit trails and better use of hedging and arbitrage opportunities through the use of decision support tools/algorithms for trading. In DMA, the broker's infrastructure is bypassed. But the trade and settlement obligations - and risk management compliance involving payment of margins and exposure limits - arising from the orders and trades in the DMA terminal will continue to apply to the broker
Since orders will be executed through the brokers system, they will have to apply to the respective stocks exchange to offer the facility to clients. The brokers will need to maintain a separate database of the orders executed and maintain an audit trail for five years. The stock exchanges will have to maintain statistical data on DMA trades. Initially, the facility is being offered to institutional clients only.
The decision to allow direct market access could improve the trading volumes of the brokerage houses, which have seen their volumes dip in the recent market meltdown. It will also pave way for algorithmic trading by arbitrage funds and hedge funds. This facility will also reduce the possibility of some brokers leaking information about the large orders of institutional clients. As the direct market process comes into being, the stock exchanges have been asked to make necessary amendments to the relevant bye-laws, rules and regulations. In the New York Stock Exchange, players like Merrill Lynch, Citi, Lehman, etc offer DMA trading systems to institutions that are basically index fund managers.