DMA, staring down a double-barreled shotgun

The culmination of that tidal wave that was unleashed upon our industry some 10 years ago with the advent of FIX, ubiquitous networks and electronic access, boils down to this; DMA (direct market access) is the new game in town and everyone wants to play.

In an industry that is constantly searching for a middle ground and a better definition for the term "value-added," edgy, technologically savvy and alpha-hungry buy-side players, aka hedge funds, are aggressively bending the delicate balance of the intermediation landscape.

The harsh reality is that small to mid-size sell-side firms that don't have the budgets or IT resources of bulge-bracket heavyweights are facing the significant double whammy of increased infrastructure strain coupled with cutthroat DMA commissions. Forget getting paid "one" cent per share when half a cent is all the rage and a quarter per or less not that far behind.

Hedge funds especially ones engaged in statistically flavored trading strategies, generate more than fifty times the daily messaging traffic that a traditional manager does. FIX networks are being pushed to their limits and with some 1300 outstanding custom tags and more in the pipe, even the protocol itself is beginning to show signs of excessive bloating.

Today, if you are a sell-side firm where institutional agency commissions constitute a major chunk of the bottom-line, these are trying times and unfortunately things are not likely to get any easier. Firms everywhere are crunching these new numbers and adjusting their expectations accordingly. However no one really has the stomach to account for the unavoidable impact of a general slowdown in trading activity like the one that followed the dot-com bust.

Reality is, players on both sides should be bracing for that inevitable headliner that will most definitely sour the pot for the hedge-fund industry and everyone else that it touches. We've already witnessed a couple of shots-across-the-bow here in Canada and the U.S. however those were not significant enough to trigger the mainstream panic-alarms, yet. With some 9000 hedge funds operating in North America today and an estimated trillion dollars in assets, one should expect that the next LTCM type story would cause a significant and long drawn commission drought.

For anyone on the sell-side, struggling to make a good case for supporting the new DMA return on infrastructure business model, factoring in a worst-case-scenario for a potential top-line negative impact of anywhere between 30% and 40%, could be downright disheartening but nevertheless very well advised.