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

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

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

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

All CFD traders or would-be Contract for difference traders should recognize the differences between the workings of both types of CFDs and the fee structures related with each sort.

Direct Market Access (Direct market access) CFDs:

Direct Market Access (Direct market access) CFDs emulate the price and liquidity of the underlying instrument on which the CFD is based. DMA Contracts for difference are the most fair and transparent sort of CFD available. When trading DMA Contracts for difference the trader is a "price maker". DMA Contract for difference traders can enter and see an equal order flow onto the underlying exchange, this guarantees 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 advantage for scalpers.

DMA Contract for difference providers do not profit directly from performance of the Contract for difference 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 immediately purchase the underlying equity as their hedge trade.

Points to be aware of:
1. The quoted price of Direct market access CFDs is the same as the price quoted on the underlying exchange;
2. Direct market access Contract for difference orders flow immediately onto the underlying exchange;
3. Direct market access CFD traders can be a price takers or makers and take part 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 get their CFD prices from the underlying instrument on which the Contract for difference is derived rather than quoting the exact exchange price of the instrument like Direct market access CFD brokers. Market Makers act as an go-between for the Contract for difference trade and have the ability to modify the price of the CFD, 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 second-rate prices.

Points to make a note 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 CFD 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 Contracts for difference in that they are normally 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 out.

Market Makers often re-quote clients when they attempt to buy or sell a CFD, re-quotes occur 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 type of CFD should you choose:

When comparing the two types of Contracts for difference you must think about 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 choose Direct market access CFDs 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 Contracts for difference 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 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 need to analyse your trading strategy and choose the style of CFD that suits you best. If you are unsure of your trading plan or would like save the hastle of having multiple CFD accounts with multiple providers you need to choose a Contract for difference provider that is able to offer you both Market Made Contracts for difference and DMA CFDs.

Other varieties of CFDs:

It is also worth noting that there is a third type 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 common among traders or investors due to their lack of liquidity and wide spreads. ASX CFDs 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 type of Contract for difference traders prefereither the Market Made or Direct Markets Access Contracts for difference.

Article Source: http://www.onlinearticlessite.com

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 type of CFD.

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