Direct Market Access vs Market Maker CFDs

At Bellmont we offer Direct Market Access (DMA) CFDs and are often asked to explain the difference between DMA vs Market Maker CFDs.  The following page outlines the main differences and as you will see Direct Market Access has major advantages over the older Market Maker model.  Firstly let’s consider an example.

Example of an AMP Trade showing costs under each CFD provider:

* This is purely and example and does NOT represent financial advice.

An important point to note in the above example is that even though the Market Maker charges lower brokerage, their additional spread on the bid offer results in a lower profit for the trader which is really a hidden trading cost that many traders do not consider.

Direct Market Access (DMA) – Summary – Bellmont / Macquarie

1. Real Market:
CFD providers using a Direct Market Access (DMA) model, quote prices identical to what is observed in the underlying market.  There is never an additional spread.  This is a very important fact given that technical traders use real market prices when calculating their entry and exit levels and therefore should also trade at real market prices.  It also means that there are no hidden costs attributable to an additional spread.  Prices and volume will never differ from what is quoted in the underlying market.

2. No Requotes:
CFD providers using a Direct Market Access (DMA) model will never requote prices when a trader places an order.  The prices quoted only change when the underlying market changes and will at all times remain identical to the underlying market.

3. 100% Hedging Methodology:
CFD providers using DMA hedge every position that you as a client places.  This means that when you place a buy order they place a corresponding buy order in the real underlying market instantaneously.  This methodology means that the DMA CFD provider has no interest in your trading results, ie: they do NOT make a profit when you make a loss and vice versa.

4. Full access to opening and closing market auctions:
CFD providers using DMA allow clients to have full participation in opening and closing market auctions.  This can be an important source of both liquidity and price movement.

5. Clients can be price takers and price makers:
This means that limit orders that are placed are simultaneously placed on the underlying market and hence the trader has the opportunity for other traders to hit, and fill their order.

Market Maker Model (pre-DMA / Older Model)

1. Synthetic Market:
Under a market maker model the CFD provider creates a synthetic market which resembles, but is NOT the actual underlying market.  The example above illustrates the additional costs that traders incur under the market maker model, which is essentially hidden brokerage.

2. Requotes:
CFD providers can manipulate the spread on a particular stock or tradable contract after a trader (you) places an order.  For example if a CFD provider using a market maker model is quoting a spread on WBC of 25.48 BID 25.53 OFFERED and you placed an order to buy 2000 at 25.53, they may tell you that the offer is now 25.54 and that you have to pay an extra cent.  Again this may not appear to be significant, however it does add up.  You will never be faced with requotes under a Direct Market Access CFD provider.  Your order will always go through at the prices quoted on the underlying contract.

3. Alternative Hedging Methodology:
CFD providers using a market making model do NOT always hedge your position, which means that when you make a loss they may make the corresponding profit and vice versa.  Clearly this creates a conflict of interest as your broker and CFD provider has an interest in you making a loss.  Traders should be skeptical of this because not only does the broker take the other side of your position they also set the prices at which you can trade.

4. No access to opening and closing market auctions:
CFD providers using a market making model do not allow clients to participate in the opening and closing market auctions.

5. Clients can only be price takers:
CFD providers using a market making model only allow clients to be price takers.  This means limit orders that are placed cannot be seen by other traders in the market, reducing the likelihood of having your limit order filled. The client always trades against the CFD provider.