January 10, 2011

CFD trading: Market Maker or DMA

By Planet Wealth

pThere are numerous CFD providers out there but do you really know how they make their money? And have you any thought what the difference between a direct market access (DMA) and market made (MM) CFD really is? Well yoursquo;re not the only one, most people donrsquo;t. Itrsquo;s time to clarify the basic facts, donrsquo;t let fancy marketing in glossy magazines and on TV fool you.nbsp;/p
pIn a nutshell market makers are precisely that, market makers! They own the price they make and make the price they own, in essence what this means is that that when you are buying and selling with a market maker you must deal at the price that they provide you or donrsquo;t deal at all. Regularly the prices quoted differ from the buy price in the underlying market on which the a href=http://www.icmarkets.com.au target=_blankCFD/a is dependent which can lead to traders paying a higher price or selling at a cheaper price than what is really available in the market. They also have a type of an invisible queuing system meaning that if theyve already filled a number of customer orders at a price and quantity that is the same as the amount obtainable in the underlying market you simply wonrsquo;t get filled, on the surface this sounds honest but the problem is that you donrsquo;t really know how many customers theyve previously filled meaning that you are buying and selling blindly in the hope they donrsquo;t have many customers buying at exactly the same price as you.nbsp;/p
pThere are four market makers in Australia it is simple to determine who they are as these are the guys you hear about the most, youve probably even been to at least one of their educational seminars. The reason market makers splurge so much money on marketing is simple, some market makers take advantage of customer losses, they then inject much of this into promoting to draw in more and more clients.nbsp;/p
pSome intelligent traders are able to profit from mispricing that often occurs because of market makers failing to turn on price feeds or simply being too slow to right prices in unstable markets naturally if you donrsquo;t know what yoursquo;re doing trying to profit from mispricing can be like playing Russian roulette./p
pIf you are not into playing Russian Roulette there is a much better way of trading that will ensure you receive to right market prices always and really know what quantity is out there in the market to buy and sell. The simple solution is to trade direct market access (DMA), DMA CFDs have the basic mechanics of their market made cousins but your order is transmitted directly onto the order book of the stock listed on the exchange over which the CFD is quoted, this is the most transparent from of CFD in existence.nbsp;/p
pAs expected there are not as many DMA CFD providers as there are Market Makers for the simple reason that they donrsquo;t make as much money. Every DMA CFD order accepted comes at a price to the CFD provider. This cost is in the form of a fee that the a href=http://www.icmarkets.com.au/ target=_blankDMA CFD/a 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 donrsquo;t get executed in the underlying market.nbsp;/p
pI hope this article helps you become farmiliar with the distinction between DMA and Market Made CFDs and helps you make the right choice when it comes to selecting a a href=http://www.icmarkets.com.au/why_ic_markets.html target=_blankCFD provider/a./p

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