Direct Access Trading (DAT)

Direct access trading (DAT) is a technology system that enables stock traders to trade directly with another client, a market maker on Nasdaq, or a specialist on the floor of an exchange, all without broker interference.

Direct access trading (DAT) is the preferred trading system for day traders, for whom success is dependent upon the speed of execution as prices change within seconds. For the average investor who holds stock for years or even decades, DAT is not necessary. There are many DAT systems for traders to choose from, and they vary in speed, accuracy and the commission price charged for each trade. Most direct access firms charge commissions based on trading volume, and on a per share basis. Retail brokerage firms, on the other hand, charge on a per transaction basis.

The Nasdaq was the first market to allow DAT, but many others have followed suit. Before the rise of DAT systems, traders would have to place orders to buy or sell stock through a traditional brokerage firm, which could cause problems with delays in trade execution and inability to get the best market price available. DAT’s lack of a middleman means that transactions are executed in milliseconds and traders’ computer screens display confirmations instantly.

One of the key features of DAT is access to a software program for trading called a Level II screen. This program enables traders to view a complete list of bid and ask prices, as well as the sizes of the orders, which gives the trader much more valuable information and a greater opportunity for profit. After a trader chooses a price to place the order, only one click is required to commence the trade, and then the trader must enter the number of shares for the order. Some direct access systems allow a trader to select a default value to be entered automatically, allowing a trader to order, for example, 1,000 shares without having to manually enter four extra keystrokes each time, which can save time and be more convenient.

DATs also give traders the ability to trade on electronic communications networks (ECNs), completely electronic stock exchanges in which orders are executed directly from the trader’s DAT and transmitted to the ECN within a fraction of a second. With most DAT systems, traders can choose to send their orders to any specific market maker, specialist or ECN, whereas online retail brokerage firms usually work with their own in-house specialists.