There are 2
main CFD models in Singapore. Direct Market Access (DMA) and non DMA
models, also known as Market Makers (MM). DMA brokers cost more and are
restricted to stock trading only. MM brokers are cheaper but traders run
the risk of increased brokerage due to larger spreads and risk of
trading at a less favorable price due to re-quote by the MM. They offer
more exotic instruments that DMA brokers may not carry due to
liquidity.
When
choosing the type of CFD model, consider your trading strategy - how
often will you enter or exit a trade? What kind of instruments are you
trading on? What is your trading time frame - multiple intra-day
scalping or swing trading over a few days?
Direct Market Access or DMA CFD model
Direct Market Access or DMA CFD brokers
mirrors the price and liquidity of the underlying instrument as
reflected in the instrument's stock exchange (e.g. the SGX). DMA
brokerage fees are normally higher but this may be mitigated by the
lower spread that traders can get. Traders using DMA have to subscribe
to level 2 data feed, which may cost $20-$60 per month, depending on the
exchange in question.
Ideally, DMA offers traders the following benefits:
- potential to be a price taker or maker
- little or no additional spreads
- straight through processing
- the ability to participate in opening and closing market auctions
DMA CFD brokers no not profit directly
from performance of the trader as the broker typically buy the actual
underlying instrument whenever the trader opts to buy.
Market Maker (MM) aka non-DMA CFD model
Market
Maker CFD brokers, are the counter party against the trader's trade and
they profit when the trader takes a loss. Upon receiving the trader's
trade, MM CFD brokers typically buy options to hedge their risk. It is
up to the discretion of the trading desk to decide on the hedging
strategy. When trading with a MM, there may be re-quotes as the CFD
broker adjust their books to allow for its internal hedging.
- often has a price discrepancy with the price on the exchange
- variable spreads and potential re-quotes
- generally does not allow traders to participate in opening and closing market auctions
- likely for MM CFD brokers to profit directly from the performance of a clients position
Generally, although the spread for a MM
CFD broker tends to be higher than a DMA broker, the brokerage fees are
lower. There is also no need to subscribe for level 2 market data
feeds.
