Higher hurdles for smaller firms?
Direct market access (DMA) forms a significant part of the market given the regulatory hoops and high fixed costs that a full exchange membership implies. While today large trading firms may let their existing memberships to smaller trading firms, similar to a company sub-letting spare office space, the current MiFID II discussion paper suggests that the well-established DMA model may face some threats. For example, ESMA wants DMA providers to apply to their DMA clients the same level of systems and controls which they themselves are subjected to by the exchange (discussion paper p.229). Also under the proposal, DMA users will be required to maintain an internal register of all their algorithms, similar to exchange members (discussion paper, p.235).
So, in effect, DMA clients could be confronted with exactly the type of fixed costs they need to avoid in the first place. If DMA were to become more onerous, financial markets could seriously suffer in the long-run. Just imagine how the world would be today if Bill Hewlett and Dave Packard hadn’t been able to get a sub-tenancy for a tiny garage back in 1939.
