Types of CFDs: DMA, Exchange Traded or Market Maker
Filed under CFDs Education
Essentially an investor can take out a contract for difference using one of three models; Market Maker, Direct Market Access (DMA) or Exchange-Traded CFDs. In the market maker model the CFD provider will quote you with its own price for the underlying financial instrument you are trading on.
Trading CFDs with a marker maker means that you are basically a price taker. Market makers do not always hedge client positions with other counter-parties or in the underlying exchange – which may mean that your provider may benefit if you are on the losing end.
If your CFD provider operates using the Direct Market Access (DMA) model, then you will be placing your orders directly in the underlying exchange when you take out a contract for difference. You can watch your order being executed via Level 2. Trading via this route makes you a price maker. This method is more transparent and less subject to abuse than the Market Maker model but on the downside the range of markets offered is quite limited.
The third method consists of exchange-traded CFDs, which presently are only available in Australia via an authorised broker. These are limited to blue chip stocks like BHP Billiton, Amcor, Woolworths and Wesfarmers. The exchange-traded CFDs model comes at a much lower level of counterparty risk as they utilise the ASX clearing house; the contract for the buyer and the seller is with the clearing house.
IG Markets claims that around 89% of CFD providers are market makers while just 20% offer Direct Market Access. Meanwhile, research from specialist marketing company Investment Trends showed that less than 5% of CFDs are exchange traded.
The first two systems trading are known to as over-the-counter CFDs, where the contract is an arrangement between you and the provider where you are both counterparties to the trade.
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Oct07
