Market Made Or Direct Market Access Cfds Which Variety Suits You?

There are two main choices of CFDs, these are:

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

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

All Contract for difference traders or prospective Contract for difference traders ought to understand the differences between the mechanics of both varieties of CFDs and the fee structures related with each sort.

Direct Market Access (Direct market access) CFDs:

Direct Market Access (Direct market access) CFDs mirror the price and liquidity of the underlying instrument on which the CFD is derived. Direct market access CFDs are the most fair and transparent type of CFD accessible. When trading DMA CFDs the trader is a "price maker". DMA CFD 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 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 major advantage for scalpers.

DMA Contract for difference providers do not gain 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 instantaneously buy the underlying share as their hedge trade.

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

Market Maker (MM) CFDs:

A Market Made Contract for difference does not emulate the price on the underlying market. Market Makers that offer Market Made Contracts for difference take their CFD 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 intermediary for the Contract for difference trade and have the ability to vary the price of the Contract for difference, price changes 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, typically 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 note down:
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 CFD 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 Contracts for difference do have some benefits over DMA CFDs in that they are generally offered over a bigger 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 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 type of CFD should you go for:

When comparing the two types of CFDs 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. Normally scalpers and active traders go for Direct market access CFDs over MM CFDs 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 popular 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 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 broker you must analyse your trading strategy and choose the type of Contract for difference that suits you best. If you are unsure of your trading plan or would like save the hastle of having multiple Contract for difference accounts with multiple providers you should select a CFD broker that is able to offer you both Market Made Contracts for difference and Direct market access CFDs.

Other varieties of CFDs:

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 CFDs 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 Contracts for difference do have the benefit of being cleared and traded on an exchange, however as there are no substantial advantages of this sort of CFD traders prefereither the Market Made or Direct Markets Access Contracts for difference.

By: Ic Markets

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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.