There are two main varieties of CFDs, direct market access (DMA) and market made (MM). The most well-liked kind is the market made variety. The main reason for the attraction of market made CFDs is basically because CFD providers offering this kind of CFD are also able to provide CFDs over indices and forex pairs. DMA CFDs are normally more common with traders which are familiar with share trading for the simple reason that DMA CFDs permit traders to take part in the opening and closing phases of the market as well as the order book of the underlying security over which the DMA CFD is based. Both types of CFD have their place amongst traders and investors and it’s important that you choose the type that suits your trading approach.
It is not uncommon for day traders and scalpers to utilise DMA CFDs rather than the market made kind as their orders flow directly onto the exchange and there’s no market maker intervention meaning that order execution speed is often faster with no risk of being re-quoted. DMA CFDs are also favoured for the reason that day traders are able to take part in and influence the opening and closing match price. The opening and closing phases of the market are usually the most liquid and of course liquidly is important in any effective day trading strategy.
Frequently day traders also have CFD trading accounts with CFD providers offering the market made variety. The reason for this is because day traders like to observe the movement of the cash indices, along with having the ability to trade them. Market made index CFDs are an inexpensive simple alternative to buying and selling the actual futures contract which usually calls for a higher upfront margin.
A number of CFD providers offer both DMA and market made CFDs from the same platform, this is the preferred solution for frequent day traders as it means that their DMA share CFD positions can be cross margined against their indice and forex CFD positions. Having both DMA and market made CFDs in a single account also saves allot of paperwork as just one account needs to be maintained, making the preparation of tax returns much easier.
Day traders frequently use both DMA and market made CFDs in their trading strategy, CFD providers who only offer market made CFDs refer to these traders as snipers as their plan revolves around taking advantage of price discrepancies between DMA and market made CFDs. Such discrepancies regularly take place during the opening and closing phases of the market as it is during these phases that there are significant price changes, some of which might not be precisely reflected in the price of the market made CFD. These pricing inaccuracies may end up in arbitrage opportunities for astute traders.
It is very important note that every trader has their own trading style, some styles are better suited to DMA CFDs and others to the market made variety. Before making the selection between DMA or market made CFDs it is advisable to take into account your trading style and ascertain whether the speed and precision of DMA CFDs or the versatility of the market made variety is better suited to you.