Market Made or DMA CFDs which kind suits you?

By Ic Markets

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

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

Some CFD providers only offer one sort of CFD others offer both. The most popular type of CFD is the market made variety, generally 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 popular.

All Contract for difference traders or would-be CFD traders need to be aware of the differences between the mechanics of both types of Contracts for difference and the fee structures related with each type.

Direct Market Access (Direct market access) CFDs:

Direct Market Access (Direct market access) CFDs mirror the price and liquidity of the underlying instrument over which the CFD is based. Direct market access Contracts for difference are the most fair and transparent style of CFD accessible. 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. DMA CFDs offer traders real time execution, guaranteed market prices and participation in the order book and opening and closing phases of the market, this provides a significant benefit for day traders.

DMA Contract for difference providers do not profit directly from performance of the CFD trader, as all client CFD positions are 100% hedged. This means that if the trader buys the Contract for difference, the broker will instantaneously purchase the underlying equity as their hedge trade.

Points to take notice of:
1. The quoted price of Direct market access Contracts for difference is the same as the price quoted on the underlying exchange;
2. Direct market access Contract for difference orders flow directly onto the underlying exchange;
3. DMA Contract for difference 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 take part 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 Contracts for difference derive their Contract for difference prices from the underlying instrument over which the CFD is based rather than quoting the exact exchange price of the instrument like Direct market access Contract for difference brokers. Market Makers act as an intermediary for the Contract for difference trade and have the ability to change the price of the Contract for difference, price changes 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 Contract for difference positions, normally 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 inferior 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 Contract for difference spreads are often widened and orders re-quoted;
3. Market Makers are price takers not price makers, this means MM Contract for difference traders cannot participate in the underlying order book;
4. MM Contract for difference 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 Contracts for difference in that they are usually offered over a larger variety 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 try to buy or sell a Contract for difference, re-quotes occur 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 CFD should you decide on:

When comparing the two varieties of CFDs you ought to take into account 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 select DMA Contracts for difference over MM Contracts for difference as there are no re-quotes and the trader can be a “price maker” through taking part in the underlying order book of the stock which they are trading. Market Made CFDs are widespread with longer term traders and those that choose 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 Contract for difference brokers 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 Contract for difference provider you ought to analyse your trading plan and go for the style 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 need to pick a CFD provider that is able to offer you both Market Made CFDs and DMA CFDs.

Other choices of CFDs:

It is also worth noting that there is a third variety of CFD, 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 Contracts for difference are only offered over a small variety of securities, indices and foreign exchange pairs. ASX CFDs do have the benefit of being cleared and traded on an exchange, however as there are no significant advantages of this style 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 variety of CFD.