Market Made Or Dma Cfds Which Type Suits You?

There are two key varieties of CFDs, these are:

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

Some Contract for difference providers only offer one sort of CFD others offer both. The most common sort of Contract for difference is the market made variety, generally this type of Contract for difference is offered by Contract for difference 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 need to be familiar with the differences between the mechanics of both types of CFDs and the fee structures related with each type.

Direct Market Access (Direct market access) CFDs:

Direct Market Access (DMA) Contracts for difference emulate the price and liquidity of the underlying instrument over which the Contract for difference is derived. DMA CFDs are the most fair and transparent sort of Contract for difference 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 participation in the order book and opening and closing phases of the market, this provides a significant benefit for day traders.

Direct market access CFD providers do not benefit directly from performance of the CFD trader, as all client CFD positions are 100% hedged. This means that if the trader buys the CFD, the provider will instantly buy the underlying share as their hedge trade.

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

Market Maker (MM) CFDs:

A Market Made CFD does not mirror the price on the underlying market. Market Makers that offer Market Made Contracts for difference obtain their Contract for difference prices from the underlying instrument on 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 go-between for the Contract for difference trade and have the ability to change the price of the Contract for difference, 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 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 note:
1. MM CFD 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 Contract for difference 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 CFDs do have some benefits over DMA Contracts for difference in that they are generally 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 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 specificprice level on the underlying exchange.

So which variety of Contract for difference should you pick:

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. Usually scalpers and frequent traders pick Direct market access CFDs over MM CFDs 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 choose to trade indices and forex. The reason for this is than often Market Markers offer both indices and forex commission free. Often DMA 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 CFD provider you must analyse your trading plan and pick the sort of CFD 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 brokers you must pick a Contract for difference broker that is able to offer you both Market Made CFDs and DMA CFDs.

Other types of CFDs:

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 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 CFDs do have the advantage of being cleared and traded on an exchange, however as there are no considerable advantages of this sort of CFD traders favoreither the Market Made or Direct Markets Access CFDs.

By: Ic Markets

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With IC Markets you can trade either Market Made CFDs or DMA CFDs. IC Markets understand that traders have varying styles and strategies that suit each variety of CFD.