Market Made or Direct market access Contracts for difference which type suits you?

By Ic Markets

There are two main types of Contracts for difference, these are:

1. Direct Market Access (Direct market access) and;
2. Market Made (MM).

Some CFD brokers only offer one type of Contract for difference others offer both. The most common style of CFD is the market made variety, normally this style of Contract for difference is offered by CFD brokers that also offer spread betting and originate in the UK where spread betting is common.

All CFD traders or would-be Contract for difference traders should understand the differences between the workings of both choices of Contracts for difference and the fee structures related with each variety.

Direct Market Access (Direct market access) Contracts for difference:

Direct Market Access (Direct market access) Contracts for difference mirror the price and liquidity of the underlying instrument on which the Contract for difference is based. Direct market access CFDs are the most fair and transparent sort of Contract for difference available. When trading Direct market access CFDs the trader is a 'price maker'. DMA 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 Contracts for difference offer traders real time execution, guaranteed market prices and involvement in the order book and opening and closing phases of the market, this provides a significant advantage for day traders.

DMA CFD providers do not profit 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 provider will instantly buy the underlying equity as their hedge trade.

Points to note:
1. The quoted price of DMA Contracts for difference is the same as the price quoted on the underlying exchange;
2. DMA Contract for difference orders flow immediately onto the underlying exchange;
3. DMA CFD traders can be a price takers or makers and participate in the market depth on the exchange, and;
4. Direct market access Contract for difference traders can participate in opening and closing market auctions.

Market Maker (MM) Contracts for difference:

A Market Made Contract for difference does not emulate the price on the underlying market. Market Makers that offer Market Made CFDs derive their Contract for difference prices from the underlying instrument over which the Contract for difference is derived rather than quoting the exact exchange price of the instrument like Direct market access CFD providers. Market Makers act as an go-between for the Contract for difference trade and have the ability to alter the price of the Contract for difference, price alterations often take place in their favor, resulting in stop orders being triggered and slippage which can add a major cost to the trade.

Market Makers do not hedge 100% of their Contract for difference positions, generally they hedge only the resulting 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 CFDs 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 be aware 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 Contract for difference traders cannot participate in the opening and closing market auctions and;
5. Some Market Makers profit from the performance of their clients positions.

Market Made Contracts for difference do have some benefits over DMA CFDs in that they are usually offered over a bigger range of stocks and indices. Market Makers are also able to offer additional liquidity in bigger stocks, the reason for this is because they have positions on their internal order book which they would like to clear.

Market Makers often re-quote clients when they attempt to buy or sell a CFD, re-quotes take place as a result of the Market Marker adjusting their internal order book to compensate for a lack of liquidity at a particularprice level on the underlying exchange.

So which variety of Contract for difference should you select:

When evaluating the two choices of Contracts for difference you need to consider whether you’re trading style and the instruments that you trade suit either a Market Made or Direct Market Access model. Generally scalpers and active traders decide on DMA 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 Contracts for difference 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 DMA CFD providers do not offer indices and forex on a Direct market access basis as by their very nature they are a market made product and cannot be traded on an exchange.

Before choosing a CFD provider you ought to analyse your trading strategy and decide on the type of CFD that fits you best. If you are unsure of your trading strategy or would like save the hastle of having multiple CFD accounts with multiple brokers you must choose a CFD provider that is able to offer you both Market Made CFDs and DMA CFDs.

Other choices of Contracts for difference:

It is also worth noting that there is a third style of Contract for difference, these are exchange traded or ASX Contracts for difference and are offered by the Australian Stock Exchange (ASX). ASX CFDs are not widespread among traders or investors due to their lack of liquidity and wide spreads. ASX CFDs are only offered over a small choice 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 type of CFD traders prefereither the Market Made or Direct Markets Access Contracts for difference.

Article Source: http://interpret.zar.vg

About The Author
With IC Markets you can trade either Market Made CFDs or DMA CFDs. IC Markets recognize that traders have varying styles and strategies that suit each sort of CFD.