Direct Access Trading

Updated: August 25, 2020

Prior to the advent of Direct Access Trading, traders would place orders to buy or sell stock through a middleman, known as the traditional brokerage firm. A trader trading in this way could incur various problems due to the presence of the middleman, such as a delay in trade execution or execution of the order at a price outside the best market price available.

Level II - Trading Through Direct Access Brokers

Direct Access Trading is a method of trading stocks without a middleman, which could eliminate many of the problems associated with traditional brokerages. Direct access brokers eliminate the trading desk or another middleman from the trade execution process, by allowing traders to connect directly to the market via a computer and internet connection. Through this direct connection, traders see the "inside market" - the best prices at which the stock can be bought or sold - as well as all the other players in the stock, thus allowing the trader much more information and a greater opportunity for profit. This transparency is displayed in a format called Level II.

Direct Access Trading (DAT) and Online Trading (trading via the internet) are actually two different forms of trading stocks (or other types of investment vehicles). While trading via the internet has empowered the individual to take a much greater role in his or her own investment strategy, direct access trading goes one step further. With the advent of legislative changes in the stock market industry over the last 15 years, Direct Access Trading has become a viable form of trading.

Although the NASDAQ was the first market to allow DAT, others have followed suit. The core feature of a DAT software program for trading NASDAQ stocks or any other trading vehicle is a market window showing virtually all the buyers and sellers of a stock by name and price, as well as the recent trades (Time & Sales, also called Prints) in that stock.

To understand more about Level II and Direct Access Trading, you will need to be familiar with some basic trading terminology:

• Direct Access Broker - A specialized brokerage that focuses on speed and execution, allowing the user to route orders to specific electronic communication networks, exchanges and market makers directly
• Bid - Buying price (the left column in the image above)
• Ask (also called the Offer) - Selling price (the right column in the image above)
• Inside Bid - Best current buying price
• Inside Ask (also called the Inside Offer) - Best current selling price
• Spread - The difference between the inside bid and inside offer
• Crossed Market - When the inside bid is greater the inside ask
• Locked Market - When the inside bid is equal to the inside ask
• Volume - Total number of shares traded in during a specific period, usually in a day.
• Long Position - Ownership of the stock with the intention to sell later at an increased price (also called "going long")
• Short Position - Borrowed (or "owed") stock, sold at current prices with the intent of buying back later at a lower price (also called "going short")
• Bull or Bullish - Bias to higher pricing (A bull swoops upward with his horns)
• Bear or Bearish - Bias to lower pricing (A bear swipes downward with his claws)
• Market Makers - The NASD member firms that use their own capital, research, and/or systems resources to represent a stock and compete with each other to buy and sell the stocks they represent. Over 500 member firms act as NASDAQ Market Makers. Each Market Maker competes for customer orderflow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the Market Maker will immediately purchase or sell shares from its own inventory, or seek the other side of the trade until it is executed. Dealers “make a market,” meaning they are quoting both a buying and selling price at all times.
• ECN (Electronic Communication Network) - an electronic order-matching system that traders can use to facilitate acting as a virtual market maker and achieving a better price.
• Market Order - Order to buy or sell at the best possible current price with a specified number of shares. Such orders are open until canceled. Orders are delivered based on availability of shares at the best price (that is “at market”).
• Limit Order - Order to buy or sell at a specified price (or better) and share size
• Pending Order - An undelivered order that is good until canceled
• Tickets - Number of trade activities. (1 buy & 1 sell = 2 tickets). Each ticket incurs an appropriate commission charge based on daily ticket volume and type of execution.
• Filled (Delivered) - A completed pending order.
• Partial Fill - An order filled at less than the amount of shares specified.

Prints

The Time and Sales Report, also known as “Prints,” lists the price, quantity and time of all trades that take place on a particular equity or tradable contract. On most DAT systems, the Time and Sales Report is found on the right hand side of the Level II quote screen. The information reported by the “Prints” is highly essential to Direct Access Trading, and most participants will consider the information here more essential than the Bid and Asks on Level II themselves. That is because the Prints report the actual cross or meeting point of actual buyers and sellers for the moment, where as the Bid and Asks are merely a display of intentions.

The information that is reported in the Prints is what software packages use to plot the charts of the stock or underlying security, calculate its effect on an index and is used by officials to correct or rectify trades.

The Prints are also essential to traders for determining exactly where the market is trading at the moment in order to fine tune their order placing technique whether it would be for scalps, swing trades and even longer-term trades.