There are lots of CFD providers to choose from but do you really understand how they make their money?
And do you know what the difference between a direct market access (DMA) and market made (MM) CFD really is? Well you’re not the only one, many people don’t. It’s time to explain the fundamental facts, do not let fancy marketing in glossy magazines and on TV fool you.
In a nutshell market makers are precisely that, market makers! They own the price they create and make the price they own, in actual fact what this means is that that if you are buying and selling with a market maker you are required to deal at the price that they provide you or do not deal at all. Regularly the prices quoted differ from the purchase price in the underlying market on which the CFD is based which can result in traders paying a higher price or selling at a cheaper price than what is actually obtainable in the market.
They even have a kind of an hidden queuing system meaning that if they have previously filled a number of client orders at a price and quantity that is equivalent to the quantity obtainable in the underlying market you simply won’t get filled, on the surface this sounds fair but the issue is that you don’t actually know how many customers they’ve previously filled meaning that you’re buying and selling blindly in the hope they do not have many clients buying at exactly the same price as you.
There are four market makers in Australia it’s easy to determine who they are as they are the guys you hear about the most, you’ve probably even been to one of their seminars. The reason market makers spend such a lot of money on marketing is simple, some market makers benefit from client losses, they then inject much of this into marketing and advertising to draw in more and more clients.
Some intelligent traders are able to take advantage of mispricing that often occurs as a result of market makers failing to turn on price feeds or just being too slow to correct prices in volatile markets naturally if you do not know what you’re doing trying to profit from mispricing can easily be like playing Russian roulette.
If you are not into playing Russian Roulette there’s a significantly better method of trading that will make sure you receive to true market prices all the time and really know what amount is obtainable in the market to buy and sell. The simple answer is to trade direct market access (DMA), DMA CFDs have the fundamental mechanics of their market made cousins however your order flows directly onto the order book of the equity listed on the exchange over which the CFD is based, this is the most transparent from of CFDavailable.
As expected there are not as many DMA CFD providers as there are Market Makers for the simple reason that they don’t make as much money. Every DMA CFD order accepted comes at a cost to the CFD provider. This cost is in the form of a commission that the DMA CFD provider must pay in order hedge the order and of course the financing cost that they incur when bowing money to finance the trade. Many of these expenses are avoided by market makers for the simple reason that the orders usually do not get executed in the underlying market.
I hope this informative article helps you understand the difference between DMA and Market Made CFDs and helps you make the correct choice when it comes to choosing a CFD provider.