Saturday, September 1, 2012

Direct Market Access Cfd Brokers: Do They Hedge Each Trade To The Market?

One of the pressing discussions in the trading market for Contracts for Difference is about the Direct Market Access CFD Broker or the Market Maker Broker. Today we'll take a look at the Direct Market Access CFD model and try to understand whether or not they hedge your trades directly into the market.

What do you mean by Direct Market Access (DMA) broker? How is Direct Market Access (DMA) broker defined?

A DMA CFD broker is a broker that allows you to place your trades directly into the underlying market without intervening in any way with that order. The use of the DMA Model provides transparency in the orders and you can be sure of what's going on as you can see all things in the market. Market Maker CFD broker serves as the alternative where they create the market for each of the many products they offer.

Normally a Market Maker broker 'mirrors' the underlying market and this only means that they will quote you prices that replicate the underlying stock you're trading but may requote you and offer any price they prefer.

Do DMA CFD Brokers really hedge orders into the market?

To explain it, hedging in this situation is that act when you have to put an order for let's say ,000 BHP and the broker gets into the share market to buy at the same amount exactly. Therefore, in this situation your CFD broker bought exactly ,000 BHP the exact same time you did. As a general rule (I haven't know of a DMA broker not doing this), your DMA CFD broker will always hedge 100% of your order directly into the market.

This makes way for your peace of mind knowing that your CFD broker will not be making money while you lose and losing as you win like what a lot of people suggest happens in a Market Maker model. The DMA broker instead only makes money through the brokerage they charge and the overnight finance too. Take note that day traders don't pay for overnight finance given that they close their position each time before trading is done. This differs in brokers but most often it is 5pm New York time.

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