Stock & Share CFDs: DMA, Market Made Vs Exchange Traded CFDs
CFD trading can be performed over a variety of underlying instruments over various exchanges.
Note that for stock CFDs you choose DMA CFDs or market made CFDs, which we'll also discuss below.
Depending on the broker or provider you can trade a range of these types of contracts for difference from differenct exchanges, including:
1. ASX CFDs (Australian Stock Exchange)
2. FTSE (UK CFDs)
3. NASDAQ and S&P500 (based on US stocks)
4. European CFDs (from a variety of European stock exchanges)
5. SGX (Singapore Stock Exchange)
6. Global CFDs (from a range of countries globally)
Now when it comes to contracts for difference, there are 2 types of share CFD products that are available, each with their own set of pros and cons. In Australia, there's a third type knwon as Exchange Traded CFDs introduced in 2007.
1. Market made CFDs
These are products that reflect the underlying market prices of stocks, but the prices have a slight spread and are made by the market maker, of the CFD provider.
The way to tell if these prices are really similar to the underlying market prices is to have a live data feed from the market you are looking at, together with the CFD platform from the broker.
The potential benefits of market made is that liquidity may be different to the underlying market and may have differnet liquidity rules. If the market is not that liquid but the provider has more generous rules of entry and exit, eg if the market trades at your price, irrespective of the volume and you can get in or out, then this may be a benefit. Of course, it depends on your broker and the rules they have for a trade to enter or exit. Just ask them.
The potential downside is that you can see a spread on the prices compared to the market. Sometimes, there may be a requote of a price. Eg if you want to buy at a certain price, but the market made price is changed, then you may get a requote that you can accept, or retry and see what you get next time.
But if the liquidity benefit has greater effect than the spread, meaning that it avoids slippage, then overall, market made CFDs may have an advantage in this regard in situations in which this applies.
2. DMA CFDs (Direct Market Access CFDs)
This is similar to traditional stock trading, in that a position is opened in the market at market prices, and also exits at market prices.
So your transactions reflect the movements of the underlying market.
YOu get market prices and not market maker prices which includes typically a spread. So there is transparency in this regard.
Also, there is typically no need for requotes.
However, a possible diasdvantage is again in less liquid stocks, where if you're trying to exit a stock for example, and the underlying market is thin, then you may get slippage. Meaning there's a difference in price between actual exit and the intended exit price.
So the one to use depends on your system, your preference and the brokers you're looking at.
Some brokers offer both types of CFDs.
Check with them the actual differences, and see if there are any extra fees such as data fees that may occur with DMA CFDs on certain stock exchanges.
And as mentioned check the rules of entry and exit: is it entry or exit if touched, and irrespective of underlying volume, or does it work differently?
And if it's market made, what is the typical spread? What percentage? And can it change with different market conditions? Ask your provider.
Some traders try the demo platform to get an idea first, as an approximate indicator of what the real account is like.
But as we mentioned, it also depends on the liquidiy of the market you're trading in as well, as to whether liquidity is an issue or not.
3. Exchange Traded ASX CFDs
This is a type of CFD introduced in Australia towards the end of 2007, and it was the first exchange traded CFDs in the world to be launched.
These CFDs are over the top 70 or so stocks in the ASX exchange based on market capitalisation, gold and a number of indices.
These exchange traded CFDs are similar to Market Made CFDs in that the spread may differ from the underlying market. However, there is a difference here between these CFDs and market made ones in that the trader may place an order and be a price maker in this regard.
So in essence it has features of both market made and direct market access. The trader will see a bid and ask (the spread) and go with these prices in their buying and selling and in effect taking a market made price. But if he or she wants to, they can place an order with their desired price that may be different to the bid or ask and may be taken as another trader accepts this price.
So a trader can be a price taker or a price maker. This is known as a multiple designated price makers (DPMs) system.
In this case of exchange traded CFDs, the trader is dealing with an exchange which is under stricter regulations than say other entities offering CFDs.
Another difference is that you can receive franking credits from dividends from exchange traded CFDs (paid for long, and payable by you for short) where this does not occur for regular, non exchange traded CFDs.
Finally, you can exchange the CFD for the underlying stock at a specified price.
So have a look at your various options and do your own due diligence and research on these various provider types.
All trading involves a high risk of financial loss, and the information on this site is for general information purposes only and is not financial advice in any form. Seek your own financial advice before taking any action.
All forms of trading involves risk of financial loss.
Also note that CFD trading is not legally permitted in some countries.
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