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Market Made or Direct market access Contracts for difference which variety suits you?

By: Ic Markets

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There are two key 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 variety of Contract for difference others offer both. The most widespread style of CFD is the market made variety, normally this type of CFD is offered by Contract for difference providers that also offer spread betting and originate in the UK where spread betting is common.

All CFD traders or potential Contract for difference traders should recognize the differences between the mechanics of both varieties of Contracts for difference and the fee structures related with each variety.

Direct Market Access (Direct market access) Contracts for difference:

Direct Market Access (DMA) CFDs mirror the price and liquidity of the underlying instrument on which the Contract for difference is based. DMA Contracts for difference are the most fair and transparent type of CFD accessible. When trading DMA 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. 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 major advantage for scalpers.

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

Points to take notice of:
1. The quoted price of DMA Contracts for difference 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 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) Contracts for difference:

A Market Made CFD does not emulate 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 on which the CFD is derived 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 CFD trade and have the ability to alter 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 significant cost to the trade.

Market Makers do not hedge 100% of their CFD positions, generally 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 Contracts for difference 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:
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 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 CFDs do have some benefits over Direct market access Contracts for difference in that they are usually offered over a larger range of stocks and indices. Market Makers are also able to offer additional liquidity in larger stocks, the reason for this is because they have positions on their internal order book which they would like to clear.

Market Makers often re-quote clients when they attempt 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 sort of CFD should you decide on:

When evaluating the two types of CFDs you need to take into account whether you’re trading style and the instruments that you trade suit either a Market Made or DMA model. Typically scalpers and frequent traders go for DMA CFDs 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 providers 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 should analyse your trading strategy and pick the sort 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 brokers you should go for a CFD broker that is able to offer you both Market Made Contracts for difference and DMA Contracts for difference.

Other choices of Contracts for difference:

It is also worth noting that there is a third style of CFD, these are exchange traded or ASX Contracts for difference and are offered by the Australian Stock Exchange (ASX). ASX Contracts for difference are not popular among 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 Contracts for difference do have the advantage of being cleared and traded on an exchange, however as there are no considerable advantages of this sort of Contract for difference traders prefereither the Market Made or Direct Markets Access CFDs.

Article Source: http://depositarticles.com/

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 type of CFD.

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