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DMA vs. Market Made vs. ASX listed CFDs

Discussion in 'Derivatives' started by GMS, Nov 25, 2009.

  1. GMS

    GMS

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    Hello,

    Just doing a bit of research and I would like some feedback please on the following questions.

    What type of CFD's are Traders trading, DMA, Market Made or the ASX listed CFDs?

    Why are you trading one type over another?

    Have you moved from market made to DMA, and why?

    Thanks.
     
  2. AlterEgo

    AlterEgo

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    DMA is the way to go, because it's identical to trading the real market, ie. same market depth, same spread, can participate in opening and closing auctions, etc. Your orders are hedged by the CFD provider by real orders in the market, so the CFD provider is not affected by movements in your positions.

    Market Maker CFD's on the other hand can have differnet bid and ask prices, and wider spread. Market Makers can basicly quote you any prices they feel like, as they run the whole show. They also take the other side of your positions, so it's in their interest for you to lose money. I just don't trust them. I have had stops hit when the price of the stock in the real market never hit that price.

    ASX CFD's - apparently have poor liquidity, so don't even go there.
     
  3. Wysiwyg

    Wysiwyg Everyone wants money

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    G'day, I have not seen this stated anywhere and would like to see this because the DMA i know states they place an order in the market for the client while creating a contract for difference between the client and the broker. They state the order can be seen by the client in the order book and nothing about a short of a clients long position.

    Be interested to know.
     
  4. Wysiwyg

    Wysiwyg Everyone wants money

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    This is the information I see.

    My interpretation of parallel is -- in line with, extending in the same direction.

    and then this.

    I haven't seen anywhere reference to hedge. "Parallel" is not against or opposite in my understanding.
     
  5. Boggo

    Boggo

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    I trade ASX CFD's when an opportunity pops up, because they are only on the top 50 stocks you can go for days without a valid buy or sell opportunity.

    They are traded on the SFE and have a few restrictions, one that I got caught on was having to ring the broker to override the 40 point move limit (see pic below), this can cost you on thinly traded CFD's.

    There is always a reliable market available and the spreads are normally reasonable (bottom pic is of today's market at around midday sorted by volume traded)

    Hope this is of some help.

    (click to expand)
     

    Attached Files:

  6. AlterEgo

    AlterEgo

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    Sorry, you’re correct. I probably didn’t word that clearly. What I mean is that the CFD provider doesn’t lose money if you win, because they have actually placed an equal position in the real market. Their equal position offsets any gain or loss they would otherwise sustain if they were taking the opposite side of your position like a market maker would. So in effect, it’s a hedge, but as the CFD provider is on the opposite side of the trade to ourselves, their hedge is in the same direction as our trade. Does that make sense? Eg. A market maker doesn’t place any trade in the real market, so if you win, they lose. A DMA provider though, having an equal position in the real market come out even no mater if your position rises or falls, therefore I’d call that hedged. Do you see what I’m getting at?
     
  7. skc

    skc Goldmember

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    You have contract with CFD provider. You are long, they are short.

    They then (or essentially straight away) go to market and hedge their own short position with a long.

    Hence the word hedge.
     
  8. Wysiwyg

    Wysiwyg Everyone wants money

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    Oh okay so the DMA contract for difference is not a parallel but an opposing contract. This following statement is incorrect because they say "we will create a parallel CFD between you and us". When by what you posted they take the opposite side. :cool:


     
  9. sinner

    sinner

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    Isn't this completely wrong? As well as what AlterEgo said?

    I thought the way it worked is different:

    Market Maker has an order book which they balance internally. i.e. if you place long on X they try and match it against a short on X from another of their clients, thus making money from the spread. They only go to the market to hedge ANY position when their order book is unbalanced (e.g. if you went long 10 positions of X and their other client was only short 9 positions of X they would take to the market to find one more short to balance). So the market maker can "win" on a position you lose on by rebalancing it against the next sucker, NOT by simply being the counterparty to your trade.
     
  10. Wysiwyg

    Wysiwyg Everyone wants money

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    Yes mate I have spoken to the DMA broker and he said they take the trade in the same direction as the client. The separate contract arrangement is because the client does not own the shares (the DMA broker does) so the CFD is active and also in the same trade direction. They do not short sell repeat do not short sell if the client goes long.

    Thank you.
     
  11. skc

    skc Goldmember

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    I was referring to DMA CFD providers. Market makers may or may not hedge, partly or fully, whether they are matching internal liquidity or not.

    With DMA CFD, they place order in market in their name, and a parallel CFD between you and them. Their market order and your CFD are parallel. Their market order and their end of the CFD are hedged.

    There is no controversy in the terms used I don't think.
     
  12. sinner

    sinner

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    Then how do you see an order going into the order book (like you are supposed to be able to) of your lot size and your direction if your broker is betting the other way?

    What Wysiwyg just posted is the opposite of what you're saying.
     
  13. AlterEgo

    AlterEgo

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    Of course the DMA provider doesn't short sell if the client goes long! I never said they did! Let me try to explain what I'm saying with some examples.

    Unhedged Example (Market Maker):
    The CFD contract is between you and the CFD provider – no other party is involved. If you gain $5,000 on your long position, where do you think that $5,000 is going to come from? It comes out of the CFD providers own funds, right? Therefore, can you see that they are effectively short when you are long, even though no short position was taken out? The further the stock rises, the more money the CFD provider loses, to you. It’s like you are making a bet with the CFD provider. If you win, they lose. If you lose, they win.

    Hedged Example (DMA):
    Now consider how the CFD provider might hedge against the above example. Would they open a short position? NO! If they opened a short position, they’d still lose the $5,000 that they owe you, PLUS they’d also lose another $5,000 on their short position. To hedge against the above example, they’d have to go LONG (the same as you). If you gain $5,000, they use their $5,000 gain on their long position in the real market to offset the $5,000 that they need to pay you.

    Is that any clearer?
     
  14. Wysiwyg

    Wysiwyg Everyone wants money

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    What skc posted is the correct interpretation but the misunderstanding is the definition of "hedge" in financial terms. Some definitions in which the DMA broker clearly does not hedge, by definition.

     
  15. sinner

    sinner

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    This is only true if they don't have someone else in their order book looking to short the same position at $5,000-spread? And in this case they hedge your order in the market I'm pretty sure they will only hold it in their order book if they think they can balance it in the next few moments. They will only pass volume onto the market if they can't balance the order in their book. So if they can balance 70% of it they might take 30% of your order to the market or something.

    How is this a hedge then? You provide the funds they provide the leverage onto the market, it's not a hedge, it's DMA just as the name implies?
     
  16. Wysiwyg

    Wysiwyg Everyone wants money

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    That was my understanding from the beginning and the recent post of "hedge" definition is the grounds of my initial post. I 100% agree with you on the process.:)
     
  17. nunthewiser

    nunthewiser

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    I have never seen the equivalant order appear in market depth on any orders i have placed via MFG DMA cfd........ am i not looking close enough ? or is it only here and there when they need to cover my position?
     
  18. Wysiwyg

    Wysiwyg Everyone wants money

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    That is my point exactly. There is only one transaction and that is the client opening a position in the market through the broker. You win they win you lose they lose. No risk has been forgone.
     
  19. AlterEgo

    AlterEgo

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    It's a hedge because is cancels out their risk. I don't know how I can make it any clearer than that.
     
  20. sinner

    sinner

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    What risk do they take on in the first place?
     
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