Of the two systems in common use, Direct Market Access for CFD trading provides the most fair and transparent pricing since DMA CFDs mirror the price and liquidity of the underlying instrument on which the CFD is based. With a DMA CFD provider you can accurately see what is available in the underlying exchange on both the buy and sell side and you can trust those figures to be real. Direct Market Access brings you into more direct contact with the market (in fact when you input an order you can even check the individual buy and sell orders on Level 2 and see your order moving up and down the exchange queue) and allows you to be a price maker as well as taking the position of accepting prices that are being offered. Because there is less possibility of re-quoting, this type of CFD brokerage is more suitable for active traders and scalpers who are looking for frequent small gains without slippage, or price adjustments after placing an order.
The trader has access to the underlying stock market and the true prices, and can even benefit from using the depth of the order book to see what pending orders there are that are outside the current price range. When you trade you can accept the bid and offer prices, or you can join the buying and selling queue to potentially get a slightly better price. Of course, to acquire access to all this information you may be charged for Level II data, but if you are a frequent trader such insight into the market is invaluable.
Equities – ‘direct access’ trading accounts can put you right in the real electronic market (e.g. LSE or NYSE) with the professional traders. They’re mostly fast platforms, and the liquidity you’re trading (i.e. whether you get filled at the price you want) is coming from THE real market. Not ‘a’ market made by the broker as so often in Forex and market makers. Incidentally, almost all Forex broker sites will cite the fact the FX is the biggest market as a reason for trading it. That’s only true in aggregate, but irrelevant if you’re only trading the part of it your broker controls.
DMA CFD traders can enter and see an equal order flow onto the underlying exchange, this ensures that at all times the trader receives true market prices on every trade. DMA Contracts for difference offer traders real time execution, guaranteed market prices and participation in the order book and opening and closing phases of the market, this provides a major advantage for scalpers.
As far as your CFD broker is concerned, there is no link between your trading performance and how much profit your provider stands to make. Since all CFD positions are automatically transferred to the exchange, the broker is market neutral. The CFD providers do not carry any market risk from the trade. In this way, DMA trading is very similar to buying shares normally on a margin loan. However, since you don’t actually own the shares, you do not incur stamp duty, making CFDs more efficient to trade.
So what are the disadvantages of direct market access? These providers tend to offer fewer CFDs than market makers. since DMA providers will only offer CFDs over an asset if there is sufficient trading volume in the underlying market. DMA trading is not available on all financial assets, but only those where there is a direct market such as equities. If you want to trade in index, forex or commodity CFDs, you will have to stick to the market maker model. It is likely that you’ll also be asked for a higher initial margin amount when trading with DMA compared to the amount required by a market maker broker.
Depending on your trading plan, it may be a disadvantage to you that you cannot obtain a guaranteed stop loss order if you use a DMA broker. The GSL is a synthetic stop loss mechanism only available from brokers who make their own market, and thus are able to guarantee the price, but at a fee. Sometimes GSL’s are advocated in order to avoid the frequent slippage between the set price of a stop loss order and the price at which the order goes through, but as Direct Market Access deals in the true market price there is no way that a guarantee can be made.
Finally, using a DMA provider is the only way in which you can participate in the opening and closing phases (auctions) of the market. For the intraday trader this can be very valuable and of course the fact that the CFD provider’s prices match those in the underlying market provides an element of transparency.