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DMA Trading

Posted By Robert On Tuesday, January 14th, 2014 With 0 Comments

Direct Market Access (DMA) Means that providers give their clients direct market feeds and hedge 100% of all client trades Placed. Consider the model below. Client sees live price feeds from the underlying financial exchange they want to trades from. Once the order is placed it feeds through the CFD provider which then the order flow to the CFD provider’s Prime Broker who Places the trade on the market. This eventually is reflected back in the clients account. It looks like a lot of distance for the order to get to the market but what actually happens is its all electronic and automatic so that your order is there in less than a second. More importantly because the client gets direct price feeds all their trades are reflected in the underlying market, they can see full market depth and the provider does not take the other side of the trade.

DMA Model

Advantages of DMA CFDs:

  • You get to see market volumes
  • Market depth
  • Ability to participate in market auctions
  • Speed of orders
  • Place order where ever you like in the market and see your order in the queue
  • With some providers you get access to more securities on an exchange
  • No requites or rejected orders
  • No slippage
  • No dealer intervention
  • Real Market Liquidity
  • No Additional Spreads
  • Full transparency
  • You are not forced to take a certain price
  • All trades are executed on a strict price/time priority
  • Provider does not profit from losses

Disadvantages

  • Not much leverage on illiquid and volatile stocks
  • Some Contacts can be bigger as smaller contracts offered by Market Makers don’t exist on an exchange
  • Liquidity can be provided where the market may not yet this proves trades are not being hedged.
  • Due to live exchange price feeds these come with a fee. Yet live price rather than a Market Makers prices is worth it for your trading
  • More exotic products can be offered and again because these may not be being hedged
  • Margins can be a bit higher than Market makers. Again this is because trades will not necessarily be hedged. Beware ridiculous leverage can be harmful to trading.

When using DMA pricing, a broker promises to deliver a bid/ask spread identical to that of the underlying market. This gives many advantages including the ability to participate within a real electronic order-driven market and gain access to the grey market. The largest limiting factor of DMA trading is the liquidity provided (which also mimics that of the underlying market).

The other advantage of DMA trading is that it ensures a delta of 1. A phenomena rarely experience with other derivatives (and synthetically priced CFDs).

The DMA trading model is different to market makers or quote driven platforms in that a DMA broker does not take proprietary positions. Instead they hedge their customers CFD transactions in the underlying ‘cash market’. The term ‘cash market’ is often used to describe the everyday stock market (eg. Australian Stock Exchange – ASX).

DMA prices are ALWAYS the underlying cash market for shares listed on the ASX (NASDAQ, NYSE, LSE & European exchanges) – guaranteed. The LSE is recognised as the greatest liquidity provider in the UK for shares as it is the official underlying cash market. Not only can you be a price taker, you may also be a price maker – ie. you can post your own bids and offers directly into the London Stock Exchange cash market which will be available for all market participants to deal on. As DMA prices are ALWAYS the same as the underlying cash market, so too is the market liquidity.

DMA providers do not requote CFD prices which means that if the volume is available to trade in the underlying cash market, you are able to trade what you see on the screen at the price you see on the screen.

DMA Trading is usually more costly to the trader in terms of commission and monthly access fees, but the savings that can be made from the controlled spreads usually makes up for the additional fees.

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