CFD Models – DMA vs Market Maker

When looking at trading CFDs a trader must be conscious of the fact that not all providers are exactly the same. CFD providers describe themselves in many different ways including Direct Market Access (DMA)CFDs, Straight through Processing (STP), DMA pricing CFDs, Hybrid DMA and Market Maker CFDs. This CFD tutorial will walk you through the two types of CFD providers and compare them.

In laymen terms there are actually only two types of CFD models and that is Direct Market Access(DMA) and Market Maker. These two models are what describe the framework used by each provider to create CFDs.

There are two big differences between the two types of models that CFD providers adopt and that is the hedging method used by the company and also the where your pricing for the instruments is derived from. As an example DMA providers will give you a direct feed from the market which means there is no slippage, you get to see market depth and your orders flow directly onto the exchange without dealer intervention. This results in real-time execution, true market prices, participation in the order book and the ability to participate in opening and closing market auctions. Another benefit is that of the ability to see volumes with DMA. This means many Technical Analysis styles can confirm market movements with volumes or look for support and resistance points in BID and OFFER queues.

Market Makers will also generally base their prices on the underlying physical market but have a dealer intervene when orders are placed. This means no market depth or volumes. This also means they have the ability to move prices creating slippage and making trading very expensive. DMA providers don’t re-quote or reject orders. Market Makers will do this proving the dealer intervention. The dealer intervention will also slow down execution speed.

When I talk about hedging this refers to the provider either taking and equal and automatic position that is the same as the trader as to mitigate all house risk by having that position in an open and live market so that all gains and losses a trader makes are gained and lost in the market rather than with the provider. A DMA provider will hedge 100% of trades in the underlying market which is why they are happy to give you live pricing and depth. A Market Maker on the other hand will Not necessarily hedge trades. This means they will take the opposite side of your trade so anything you lose they profit. Very similar to a book maker. In the UK, where CFDs originally stemmed from,  this is referred to as ‘Spread Bet’ and its tax free trading but here in Australia there is no real tax advantage which is why DMA CFD trading is becoming very popular.

There are many Advantages and disadvantages to both CFD models which I will post in the next two blogs. Have a look at the table below which will summarise what we have discussed.