What is a Direct-Access Broker?

A direct-access broker is a stockbroker that concentrates on speed and order execution—unlike a full-service broker that focuses on investment research and advice. Direct-access brokers usually use complicated computer software that allows clients to trade directly with an exchange or with other individuals via electronic communication networks (ECN).

Key Takeaways

  • Direct-access brokers have become very popular among active traders because of their speedy transaction times, but other services such as streaming quotes, interactive charts, Level II Nasdaq quotes and other real-time features have also contributed to this success.
  • As markets become more efficient with technology enhancements, the need for quicker trade-execution is ever increasing. More and more retail investors are accessing the marketplace with their smartphones rather than using a desktop or voice-directed trades with a human.
  • There are advantages and disadvantages along the broker spectrum of full service to hyper low-cost options. Sophisticated institutional investors with in-house research teams might not want to pay for full-service execution which includes research and trading ideas.

As markets become more efficient with technology enhancements, the need for quicker trade-execution is ever increasing. More and more retail investors are accessing the marketplace with their smartphones rather than using a desktop or voice-directed trades with a human.

Understanding a Direct-Access Broker

Direct-access brokers have become very popular among active traders because of their speedy transaction times, but other services such as streaming quotes, interactive charts, Level II Nasdaq quotes and other real-time features have also contributed to this success. These brokers have cut down their costs and increased efficiency by eliminating the role of the third party, which in turn allows them to charge a lower commission than traditional brokers.

The latest trend for online brokers is commission free trading on stocks, ETFs, and options. Most of these free platforms, however, sell the order-flow to market-makers and HFT hedge funds. These arrangements are payment for order-flow or PFOF.

Conventional online brokers generally direct customer trade orders to a centralized trading desk that then routes to the firm’s own market makers or other pre-determined liquidity providers through pre-negotiated order flow arrangements. These platforms tend to push research and fundamental analysis functions over pure execution services. These brokers cater to self-directed investors and retail swing traders.

There are advantages and disadvantages along the broker spectrum of full service to hyper low-cost options. Sophisticated institutional investors with in-house research teams might not want to pay for full-service execution which includes research and trading ideas.

However, to capitalize on proprietary research and ideas, at times, they will seek and pay a premium for rapid trade execution. In contrast, buy-and-hold long-term investors do not require immediate execution, so paying a premium wouldn't make a great deal of sense. But research and advice which can be costly to assemble themselves can be a value-add service.

Advancements in global capital markets, as well as information technologies, continue to drive down the costs for financial market participants—in many ways, the traditional lines between full-service and online discount brokerages get ever blurrier.

Example of Direct-Access Broker

Let's assume a customer is looking to buy 100 shares of stock ABC. Because her broker, Market Brokerage of America, offers both direct access to exchanges via an app and the ability to place a trade with a human over the phone - the customer has a choice. One option is quick if the retail trader is looking for execution only and the other choice makes the most sense if the customer needs further guidance from human help.

The choice to make the trade via the app made the most sense for the customer because she has already done the research on company ABC and is familiar with the trading platform. This decision to use the direct access of the app with her phone saves both time and commission dollars.