Market Makers, Direct Market Access and how to get transparent pricing

You may be surprised to learn that when you place a trade on your share dealing platform, unless it offers DMA dealing, it doesn’t go directly to the London Stock Exchange.

This is because most retail share dealing platforms will use the Retail Service Provider (RSP) method of executing trades.

Retail Service Providers

RSPs are market makers that provide liquidity to retail share dealing platforms and are ready to buy or sell your order at any time.

When you place an order to buy or sell your broker will electronically send your order to a group of RSPs and await the best price to be returned. This happens in milliseconds and you are usually given 15 seconds to accept the price.

Keeping your options open

Here comes the benefit of having more that one broker. Not every share dealing platform will use the same RSP and some will access a larger pool than others.

If you have more than one broker you can enter orders and see who is giving you the best price without being obligated to buy or sell.

This can be great when you are trying to buy a stock with lower liquidity and in times of volatility because having access to a range of different share dealing platforms means you can check whether you are getting a good price by comparing quotes of each platform.

DMA Level 2

Getting a good price is important to all investors. Nobody wants to pay more than they have to for their securities.

But how do you ensure you are getting the best possible price?

One way to help do this is to use Direct Market Access (DMA). Share dealing providers such as IG provide Level 2 data and the functionality to deal directly into the markets without the involvement of a RSP.

Level 2 data shows the order book of a stock where you will be able to see the orders that make the ‘spread’.

The spread is the price at which you can buy and sell and is made up of lowest offer and the highest bid.

Having access to this greatly improves transparency when executing a trade because you will be able to see how many shares are available to be bought at a particular price.

Gaining insight into Level 2 data on one share dealing platform can help when executing a deal via RSP on another platform.

You may have experienced a re-quote or even been told you can not execute a trade when using a RSP. This is obviously frustrating and can be costly. If you have access to Level 2 data you will know why this is happening and can adjust your trade accordingly.

Limit Orders

In this situation it may be worth using a limit order to enter a trade. In fact, using a limit order with Level 2 when entering into any trade can help to get a better price.

You will pay no more that the price you enter as the limit order price and avoid re-quotes and paying high prices when liquidity is low.

By using DMA limit orders you become a ‘price-maker’ instead of a ‘price-taker’.

Share dealing platforms such as IG and Hargreaves Lansdown offer the use of limit orders for free.

To visit IG for more information on DMA share dealing, please click here.

Many advisory brokers will also offer limit orders for free and can quickly tell you sensible levels to enter a limit given recent trading activity.

Share Dealing Price Comparison:

Below you will find a comparison of leading share dealing services. IG Markets is one of the only platforms available in the UK which allows individual investors to trade shares with Direct Market Access.

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**The Share Centre charges 1% for standard accounts that do not pay £20+VAT per quarter

*** Nutmeg doesn’t offer individual share dealing instead their experienced investment team invests your funds in a diversified portfolio.

The above rates are subject to change. The above table uses each providers headline rate, please review the details of each companies charging structure below.