The Facts about DMA CFDs

There are two kinds of CFD models, Market Maker and Direct Market Access. Each type has its own advantages and disadvantages and each CFD provider makes money in a very different way. It is essential to understand how CFD providers make money when you trade. In this article we are going to look at Direct Market Access or DMA CFD providers only.

Direct Market Access CFDs are the most transparent variety of CFD available, the main reason for this is basically because DMA CFD providers hedge every order they receive from their clients in the underlying market. When trading DMA CFDs you'll actually see the CFD providers hedge trade in the order book of the share listed on the underlying exchange on which the CFD is quoted.

In order to hedge in a cost efficient manner and enable the DMA CFD provider to provide CFDs on international exchanges the DMA CFD provider will utilize the execution services of a international investment bank which has exchange memberships globally. Having a relationship with one execution provider also allows the DMA CFD provider to attain economies of scale resulting in lower execution and financing costs for the provider and ultimately the end customer.

The global investment banking institutions offering the DMA execution into the underlying exchange on behalf of the CFD provider also provide the financing on the positions, this execution and financing service combined works much in a similar way to a CFD but on a much bigger scale. The CFD provider’s hedge transactions with the investment bank are often called SWAP transactions and the service offered by the bank is called prime broking.

A DMA CFD provider model is simple, aggregate as many client orders and positions as possible with the intention to attain reduced execution and financing rates on the SWAP contracts offered by their prime broker.

CFD providers generate income much like any business where the business owner purchases from the wholesaler and then offers the merchandise in stores to retail consumers.

The formula is simple, if your CFD provider is charged 0.01% commission on their SWAP trade and pay a financing rate of 0.50% above or beneath the RBA rate any they charge you 0.10% commission for the trade and 3.00% above or beneath the RBA rate they are going to make money. Along with making money on commission and financing DMA CFD providers also obtain the advantage of netting all client positions against each other. Put simply netting means that if a long position offsets a short position the CFD provider has no position, however, as the customer who is long is having to pay interest and the customer who is short is being paid interest less a small haircut, the CFD provider profits through the difference between both interest rates.

It is important to note that prime brokers will not deal with retail clients themselves and will usually only deal with large hedge funds and CFD providers, as such CFDs are a great way of achieving access to global markets in much the same way as the international investment banks themselves and hedge funds do.

Article Source: http://www.newsarticlessite.com

Matthew Jones is one of the most qualified DMA CFD traders in Australia. Matthew has been investing for over 15 years and began trading CFDs when they were initially first launched in Australia in 2003. Matthew is a well known CFD trader having traded with all of the major CFD providers and published a number of guides and educational manuals on trading Market Made and DMA CFDs for a livelihood, including titles such as How to Choose your CFD provider and What is a DMA CFD?.

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