Are Market Made Cfds Cheap?

Posted by Finance Professional on September 28, 2010 under Stock Market News | Be the First to Comment

There’s a common fallacy in the CFD industry that commission charges on DMA CFDs are greater than on their Market Made cousins, in this informative article we will dispel this myth and help you understand the differences between Direct Market Access (DMA) and Market Made CFDs and why this is a common misconception amongst traders and investors.

If you are a CFD trader you will probably already know that there are two types of CFDs, DMA and Market Made, the primary difference being that when trading with a DMA CFD provider your orders flow directly into the underlying market whereas when using the Market Made variety your orders are accepted at the discretion of the CFD broker and may not always flow onto the market. Most Market Makers essentially run a book aggregating all of their client’s positions and hedging any resulting outstanding amounts.

The popular misconception of pricing has occurred due to the fact that DMA CFD providers incur a cost to hedge their trades. Many people believe that because of this added hedging cost DMA CFDs are more expensive to trade, however this is not the situation. With the introduction of electronic order routing DMA execution costs have declined significantly. DMA cost reductions have been largely due to brokers competing for market share and the rebates offered by the exchanges to high turnover market participants. With DMA Costs down to 1bps or less it is not surprising that many CFD market makers are currently also offering DMA CFDs and hedging risk on their market made book more frequently.

The ultimate beneficiaries of lower hedging fees are the end customers of the CFD provider. As hedging cost decline your DMA CFD provider is in a position to pass on these fee reductions to their clients, meaning that nowadays retail traders are able to day trade and scalp DMA CFDs quite cheaply.

With no real difference in commission rates between buying and selling DMA CFDs or trading Market Made CFDs it is not surprising that DMA CFDs are gaining in popularity amongst retail traders and expert investors alike. Some DMA CFD brokers are even offering commission rates that are lower than those offered by their market made cousins, pioneering a path for the new wave of CFD trader.

Of course you should at all times remember that there are advantages and drawbacks of both CFD varieties, it is essential to decide which variety is more suitable to your method of investing. You should also keep in mind that buying and selling CFDs can be risky if you do not use proper money management methods to manage your risk. You can find many articles on money management on the internet, it is always highly recommended to read these guides prior to trading CFDs.