Market Made or DMA Contracts for difference which variety suits you?

By Ic Markets

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

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

Some CFD providers only offer one style of Contract for difference others offer both. The most widespread style of Contract for difference is the market made variety, usually this sort of CFD is offered by Contract for difference brokers that also offer spread betting and originate in the United Kingdom where spread betting is common.

All Contract for difference traders or prospective Contract for difference traders need to be familiar with the differences between the mechanics of both choices of Contracts for difference and the fee structures related with each variety.

Direct Market Access (Direct market access) CFDs:

Direct Market Access (Direct market access) Contracts for difference mirror the price and liquidity of the underlying instrument over which the CFD is derived. DMA CFDs are the most fair and transparent type of Contract for difference accessible. When trading DMA Contracts for difference 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 Contracts for difference 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 CFD providers do not benefit 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 immediately purchase the underlying equity as their hedge trade.

Points to note:
1. The quoted price of Direct market access CFDs is the same as the price quoted on the underlying exchange;
2. Direct market access CFD orders flow directly onto the underlying exchange;
3. Direct market access 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) CFDs:

A Market Made CFD 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 based rather than quoting the exact exchange price of the instrument like Direct market access CFD providers. Market Makers act as an intermediary for the CFD trade and have the ability to alter 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 major 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 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 note down:
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 participate 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 Direct market access Contracts for difference in that they are usually offered over a larger variety 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 out.

Market Makers often re-quote clients when they try to buy or sell a Contract for difference, 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 style of CFD should you select:

When comparing the two types 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. Usually scalpers and frequent traders go for Direct market access Contracts for difference 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 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 CFD 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 must analyse your trading strategy and select the variety of Contract for difference that suits you best. If you are unsure of your trading strategy or would like save the hastle of having multiple Contract for difference accounts with multiple providers you need to pick a Contract for difference provider that is able to offer you both Market Made Contracts for difference and DMA CFDs.

Other varieties of Contracts for difference:

It is also worth noting that there is a third sort of CFD, these are exchange traded or ASX Contracts for difference and are offered by the Australian Stock Exchange (ASX). ASX CFDs are not common among traders or investors due to their lack of liquidity and wide spreads. ASX Contracts for difference are only offered over a small range of securities, indices and foreign exchange pairs. ASX CFDs do have the advantage of being cleared and traded on an exchange, however as there are no major advantages of this style of Contract for difference traders chooseeither 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 are aware that traders have varying styles and strategies that suit each sort of CFD.