Direct Market Access CFDs versus Market Maker CFDs
The two main CFD models on offer at present are Direct Market Access and Market Maker. In late 2007, Exchange Traded CFDs will also be available in some countries and with limited confirmed information currently available, some assumptions will be made on this. Choosing a CFD provider can be like asking someone else what suburb to buy real estate in or perhaps buying a car; it depends on a host of circumstances, costs, beliefs and technical factors.
Find the CFD providers that best fits your needs, not theirs!
Some CFD companies (like those in many other industries) also think that once they have your account it’s harder to change providers so they offer great deals and promises to get you on board and often the service ends then. Check the summary points below against companies you know to shortlist maybe three companies. Put $2,000 in each or whatever is the minimum you can negotiate and often you can put $5,000 in and can withdraw $4,000 three days later and keep the account live. Look at their live platform, compare live data prices, the platform and if you can, check that charts agree and put in a few small value live trades to ‘walk their talk’. Remember, you are checking they meet your needs, not vice versa.
Here is a summary of the general characteristics to consider:
Direct Market Access CFDs:
- Can participate in the opening and closing auction.
- Orders are processed directly in line with ASX market quantities.
- Stop loss orders can remain unfilled if outside the range specified in the PDS.
- Quoted prices are derived from the underlying quantity.
- No added liquidity using their own order book.
- Will usually be hedging one to one which becomes expensive.
- Will participate in dividends.
- Some limitations on short tradable stocks.
- May offer indices, International shares and/ or commodities but usually through Market Makers.
- Slightly higher brokerage and/or finance rates to cover higher costs.
- Do not usually offer a Guaranteed Stop Loss Order.
Market Maker CFDs:
- The price offer to buy and sell is ‘based’ on the underlying market and the quantity is ‘relevant’ to the underlying. Sometimes the prices are referred to as ‘mirroring’ the underlying (cash/real) price. The companies order book, hedging exposure and access to other derivatives to fill the orders may impact on the quality of your fills.
- Trade a wide range including sectors, indices, commodities and treasuries.
- Will usually participate in dividends and stock splits but not franking credits.
- Can offer a wider range of stocks to be short sold.
- Often hedge their own trades so they can sometimes offer additional liquidity through their own book.Transactions are priced on the group quantity so may be done quicker but at the full volume available.
- Stop loss orders typically become market orders when triggered.
- Can widen the spread but many still work to tight ranges.
- Can provide Guaranteed Stop Loss Orders (GSLOs) i.e. exit price is guaranteed even if the price moves against you. A premium is charged to guarantee the position and usually other terms like the minimum distance from the entrance price are also imposed, as are market hours for order placement, but this can be an insurance policy for some traders, albeit after paying a premium.
- Similar to the DMA model and offer prices from a secondary market of agreed Market Makers.
- Not able to add liquidity based on other clients trading but will probably match real market prices.
- Will be a more limited range of products – quoted as 100 top stocks.
- Some possible limitations on the short stocks available.
- Can participate in dividends and may offer some franking credits (this will be a major differentiator and extremely relevant for some traders).
- Cannot offer Guaranteed Stop Loss Orders.
- Will need to remain competitive so while they may not offer the best terms presently, they will find strengths that appeal to certain clients so make sure you consider all the opportunities before committing (even if only emotionally) to one provider.
So which one is better for you? Well the answer is all, some or none. It depends on your individual needs, order types and beliefs so you will need to look at all 3 and work through the pros and cons yourself. Each one has merits and the individual companies’ charges will also affect your decision. I have put together a checklist as a bonus to help you define the types of questions that may be required for your system but in the end you will have to find the key factors for your trading and the better providers to achieve this.
If using a GSLO is important to you then your choices are limited to MM only. If you have the belief that you only get good prices at market open, you will need the DMA or Listed pre-market open facility. If low prices are crucial as you trade frequently then the lowest rates become paramount and if you want to trade a broad range then the MM models normally provides a much broader range and competitive prices and data overall.
Some providers have specific limitations on order types and the way they fill them. Others give access to international products (for diversity) which may suit your strategy as well – so start shopping.
The top issues for most traders probably are:
- Will the CFD Provider be able to offer the order types that match my trading system?
- Are the prices offered competitive (brokerage, monthly fees, spreads, data etc)?
- If I rely on the CFD providers charts, is the data consistent and reliable (they often use outside sources and compatibility issues can cause anomalies).
- If you want help at the end of the day, is someone available to talk to you?
- Is your money safe in the event the market takes a dramatic turn around and the CFD provider closes its local operations?
- Something else that may be important to you? Check what they all offer to meet this need.
As I said, put $2,000 in each preferred company (or whatever is the minimum you can negotiate) and look at their live platform, compare live data and if you can, check that charts and spreads agree against ASX prices and put in a few live trades to ‘walk the provider’s talk’. On such an important decision it makes sense to try before you buy so don’t go easy just because of a salesperson’s pitch.