Market Made or DMA CFDs which kind suits you?
There are two main types of CFDs, these are:
1. Direct Market Access (Direct market access) and;
2. Market Made (MM).
Some CFD providers only offer one style of Contract for difference others offer both. The most common sort of CFD is the market made variety, usually this variety of CFD is offered by CFD brokers that also offer spread betting and originate in the UK where spread betting is common.
All Contract for difference traders or potential CFD traders need to understand the differences between the workings of both types of Contracts for difference and the fee structures associated with each type.
Direct Market Access (Direct market access) Contracts for difference:
Direct Market Access (Direct market access) CFDs mirror the price and liquidity of the underlying instrument on which the CFD is derived. DMA CFDs are the most fair and transparent variety of CFD available. When trading DMA CFDs the trader is a “price maker”. Direct market access Contract for difference traders can enter and see an equal order flow onto the underlying exchange, this ensures that at all times the trader receives true market prices on every trade. Direct market access CFDs offer traders real time execution, definite market prices and involvement in the order book and opening and closing phases of the market, this provides a major advantage for day traders.
DMA CFD providers do not gain directly from performance of the CFD trader, as all client Contract for difference positions are 100% hedged. This means that if the trader buys the Contract for difference, the broker will instantaneously buy the underlying share as their hedge trade.
Points to note:
1. The quoted price of DMA CFDs is the same as the price quoted on the underlying exchange;
2. DMA Contract for difference orders flow immediately onto the underlying exchange;
3. Direct market access CFD traders can be a price takers or makers and take part in the market depth on the exchange, and;
4. Direct market access CFD traders can participate in opening and closing market auctions.
Market Maker (MM) CFDs:
A Market Made Contract for difference does not mirror the price on the underlying market. Market Makers that offer Market Made CFDs take their CFD prices from the underlying instrument on which the CFD is based rather than quoting the exact exchange price of the instrument like DMA CFD providers. Market Makers act as an intermediary for the CFD trade and have the ability to modify the price of the CFD, price alterations often occur in their favor, resulting in stop orders being triggered and slippage which can add a significant cost to the trade.
Market Makers do not hedge 100% of their CFD positions, normally they hedge only the resultant amount after their clients long and short positions net each other off, however in many cases they do not hedge at all and often directly profit from their client’s losses. When trading Market Made Contracts for difference trades do not flow directly onto the exchange, trades are filled at the discretion of a dealer as a result orders are filled slower and at second-rate prices.
Points to take notice of:
1. MM Contract for difference traders do not receive the same prices as those quoted on the exchange;
2. MM CFD spreads are often widened and orders re-quoted;
3. Market Makers are price takers not price makers, this means MM CFD traders cannot take part in the underlying order book;
4. MM CFD traders cannot take part in the opening and closing market auctions and;
5. Some Market Makers profit from the performance of their clients positions.
Market Made CFDs do have some benefits over DMA CFDs in that they are normally offered over a larger range of stocks and indices. Market Makers are also able to offer added liquidity in bigger stocks, the reason for this is because they have positions on their internal order book which they would like to clear out.
Market Makers often re-quote clients when they attempt to buy or sell a CFD, re-quotes occur as a result of the Market Marker adjusting their internal order book to compensate for a lack of liquidity at a specificprice level on the underlying exchange.
So which type of Contract for difference should you select:
When evaluating the two choices of Contracts for difference you must think about whether you’re trading style and the instruments that you trade suit either a Market Made or DMA model. Generally scalpers and active traders pick Direct market access CFDs over MM Contracts for difference as there are no re-quotes and the trader can be a “price maker” through participating in the underlying order book of the stock which they are trading. Market Made CFDs are common with longer term traders and those that prefer to trade indices and forex. The reason for this is than often Market Markers offer both indices and forex commission free. Often Direct market access CFD providers do not offer indices and forex on a DMA basis as by their very nature they are a market made product and cannot be traded on an exchange.
Before choosing a CFD broker you should analyse your trading plan and decide on the style of CFD that suits you best. If you are unsure of your trading plan or would like save the hastle of having multiple CFD accounts with multiple brokers you ought to choose a CFD broker that is able to offer you both Market Made CFDs and DMA Contracts for difference.
Other varieties of Contracts for difference:
It is also worth noting that there is a third sort of Contract for difference, these are exchange traded or ASX CFDs and are offered by the Australian Stock Exchange (ASX). ASX Contracts for difference are not widespread amongst traders or investors due to their lack of liquidity and wide spreads. ASX CFDs are only offered over a small range of securities, indices and foreign exchange pairs. ASX Contracts for difference do have the benefit of being cleared and traded on an exchange, however as there are no considerable advantages of this style of Contract for difference traders favoreither the Market Made or Direct Markets Access CFDs.
With IC Markets you can trade either Market Made CFDs or DMA CFDs. IC Markets are aware that traders have varying styles and strategies that suit each style of CFD.
Article Source: SuperPublisher.com
