# DMA vs. Market Made vs. ASX listed CFDs



## GMS (25 November 2009)

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.


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## AlterEgo (25 November 2009)

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.


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## Wysiwyg (25 November 2009)

AlterEgo said:


> *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.



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.


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## Wysiwyg (25 November 2009)

AlterEgo said:


> *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.



This is the information I see.



> But as soon as there is sufficient market liquidity at your buying level, *the order is filled and we take a parallel position in the underlying market* to reflect your new position.



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

and then this.



> *It is important to note that while you are trading based
> on underlying market prices and depth, what you actually
> receive on placing a trade is a CFD from us.*
> 
> ...




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


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## Boggo (25 November 2009)

AlterEgo said:


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




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)


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## AlterEgo (25 November 2009)

Wysiwyg said:


> 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.




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?


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## skc (25 November 2009)

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.


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## Wysiwyg (25 November 2009)

skc said:


> 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.



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.  




> If the margin check is satisfied, we will place an order in our name in the market and, simultaneous to this, we will create a parallel CFD between you and us.


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## sinner (25 November 2009)

skc said:


> 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.




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.


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## Wysiwyg (25 November 2009)

AlterEgo said:


> Do you see what I’m getting at?




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.


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## skc (25 November 2009)

sinner said:


> 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.




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.


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## sinner (25 November 2009)

skc said:


> 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.




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.


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## AlterEgo (25 November 2009)

Wysiwyg said:


> 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.




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?


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## Wysiwyg (25 November 2009)

sinner said:


> 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.



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.



> *In finance, a hedge is a position established in one market in an* *attempt to offset exposure to price fluctuations in some opposite* *position in another market with the goal of minimizing one's* *exposure to unwanted risk*.





> *In finance, a hedge is an investment that is taken out* *specifically to reduce or cancel out the risk in another investment.* The term is a shortened form of " hedging your bets", a gambling term. Typical hedgers purchase a security that the investor thinks will increase in value, and combine this with a "short sell" of a related security or securities in case the market as a whole goes down in value.





> *A security transaction that reduces the risk on an already existing investment position.* An example is the purchase of a put option in order to offset at least partially the potential losses from owned stock. Although hedges reduce potential losses, they also tend to reduce potential profits.





> Making an investment to reduce the risk of adverse price movements in an asset. *Normally, a hedge consists of taking an offsetting* *position in a related security, such as a futures contract.*


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## sinner (25 November 2009)

AlterEgo said:


> 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.




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.



> *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?




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?


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## Wysiwyg (25 November 2009)

AlterEgo said:


> *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 lo se 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?



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.


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## nunthewiser (25 November 2009)

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?


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## Wysiwyg (25 November 2009)

sinner said:


> 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?



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.


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## AlterEgo (25 November 2009)

sinner said:


> How is this a hedge then?




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


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## sinner (25 November 2009)

AlterEgo said:


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




What risk do they take on in the first place?


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## AlterEgo (25 November 2009)

nunthewiser said:


> 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?




I don't know about MFG, but when I place a DMA order with FP Markets, the order appears in the market depth almost instantly. I can trade shares and DMA CFD's on the same platform with them, and to the user there's no apparent difference between them.


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## Wysiwyg (25 November 2009)

nunthewiser said:


> 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?



I know you can buy and sell shares in the synthetic market without the underlying shares existing!


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## AlterEgo (25 November 2009)

sinner said:


> What risk do they take on in the first place?




The risk of you making a profit. If they weren't hedged, they'd have to pay you your profit out of their own funds.


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## Wysiwyg (25 November 2009)

Wysiwyg said:


> 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.




Then the broker debits the client the amount of loss incurred from the trade or credits the client the amount of gain which they extracted from the market.


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## AlterEgo (25 November 2009)

Wysiwyg said:


> Then the broker debits the client the amount of loss incurred from the trade or credits the client the amount of gain which they extracted from the market.




The client is not extracting the profit "from the market". The client is extracting the profit "from the CFD provider". The CFD contract is only between you and the CFD provider - the stock market is not involved. Nothing goes to the stock market (unless the CFD provider wishes to hedge the position). The CFD is essentially a "bet" with the CFD provider (the "bookie").


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## Wysiwyg (25 November 2009)

AlterEgo said:


> If they weren't hedged, they'd have to pay you your profit out of their own funds.



Then that would not be a DMA trade if they did not take direct market participation. It would be a trade in a synthetic market.


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## sinner (25 November 2009)

AlterEgo said:


> The client is not extracting the profit "from the market". The client is extracting the profit "from the CFD provider". The CFD contract is only between you and the CFD provider - the stock market is not involved. Nothing goes to the stock market (unless the CFD provider wishes to hedge the position). The CFD is essentially a "bet" with the CFD provider (the "bookie").




This is the opposite of what you said a moment ago. If there is a parallel contract running in the market, then the market IS involved. What the hell are you talking about?


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## Wysiwyg (25 November 2009)

AlterEgo said:


> The client is not extracting the profit "from the market".



 The sentence is about the broker.

Then *the broker* debits the client the amount of loss incurred from the trade *or* credits the client the amount of gain which they extracted from the market.


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## AlterEgo (25 November 2009)

Wysiwyg said:


> Then that would not be a DMA trade if they did not take direct market participation. It would be a trade in a synthetic market.




Exactly! A "market maker" does not take a position in the real market, but a DMA provider does (which is their hedge).


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## Wysiwyg (25 November 2009)

AlterEgo said:


> (which is their hedge).



 Is not! :



> In finance, a hedge is a position established in one market in an attempt to offset exposure to price fluctuations in some opposite position in another market with the goal of minimizing one's exposure to unwanted risk.






> In finance, a hedge is an investment that is taken out specifically to reduce or cancel out the risk in another investment. The term is a shortened form of " hedging your bets", a gambling term. Typical hedgers purchase a security that the investor thinks will increase in value, and combine this with a "short sell" of a related security or securities in case the market as a whole goes down in value.






> A security transaction that reduces the risk on an already existing investment position. An example is the purchase of a put option in order to offset at least partially the potential losses from owned stock. Although hedges reduce potential losses, they also tend to reduce potential profits.






> Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.


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## AlterEgo (25 November 2009)

sinner said:


> This is the opposite of what you said a moment ago. If there is a parallel contract running in the market, then the market IS involved. What the hell are you talking about?




No, not the opposite of what I said before. We're talking about 2 different things on here, "market maker" and "DMA provider". If there's a parallel contract running in the real market, then that is DMA. I was talking about "market maker".


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## sinner (25 November 2009)

AlterEgo said:


> No, not the opposite of what I said before. We're talking about 2 different things on here, "market maker" and "DMA provider". If there's a parallel contract running in the real market, then that is DMA. I was talking about "market maker".




Maybe you should be more specific then?

If you are a DMA broker, and a client provides funds for you to make a trade, you take those funds to your liquidity provider to get the leverage. You place an order with the funds and leverage on the market, and provide your client with a parallel contract. If your client loses, there is less money on the table than at the beginning so they pay the difference to you. If your client wins, there is more money on the table than at the beginning, they take their profits and funds home, you return the leverage to your liquidity provider, that is it. There is no hedge. There is no risk taken on. Stop saying there is a hedge unless you can explain what you mean better or correct my interpretation of what happens.

If comsec provides me with a $10,000 margin loan then they don't care about which contracts I'm trading (as long as they're the sanctioned ones of course), just that at the end of the day they get their loan + interest back. At no point do they they become out of pocket if you win a trade. In which case would it be different and why?


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## AlterEgo (25 November 2009)

sinner said:


> Maybe you should be more specific then?
> 
> If you are a DMA broker, and a client provides funds for you to make a trade, you take those funds to your liquidity provider to get the leverage. You place an order with the funds and leverage on the market, and provide your client with a parallel contract. If your client loses, there is less money on the table than at the beginning so they pay the difference to you. If your client wins, there is more money on the table than at the beginning, they take their profits and funds home, you return the leverage to your liquidity provider, that is it. There is no hedge. There is no risk taken on. Stop saying there is a hedge unless you can explain what you mean better or correct my interpretation of what happens.
> 
> If comsec provides me with a $10,000 margin loan then they don't care about which contracts I'm trading (as long as they're the sanctioned ones of course), just that at the end of the day they get their loan + interest back. At no point do they they become out of pocket if you win a trade. In which case would it be different and why?




You seem to be making a simple concept overly complicated. The Comsec example is different, because you are buying the shares from *the market*, NOT from Comsec. Your profits comes from the other market participants, not from Mr. Comsecs' pocket. An analogy would be playing a game of poker for money. Your profits come from the other players, not from the dealers' pocket. Comsec is like the dealer, Comsec just facilitates the transfer of shares from one person to another.

A CFD contract is different though. It is a contract between you and the CFD provider ONLY. No shares are involved, no other market participants are involved, it's purely a contract between YOU and the CFD PROVIDER. An analogy would be making a bet with a bookie at the races. If you win, your profit comes out of his pocket.

DMA is like the above CFD contract, *except *the CFD provider has taken a position himself, in the actual stock market, to counter any profit you may make, so he won't wind up out of pocket. That is a hedge!


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## skc (26 November 2009)

This conversation is like a never ending round about... all you need to know is already said below. If you can't understand it then really... you should brush up on your finance terms before trading CFDs 

And for the last time, what the DMA providers do is called a hedge! There are 2 transactions.

1. Between you and DMA provider
2. Between DMA provider and market

Transaction 2 is the hedge against 1.



skc said:


> 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.






nunthewiser said:


> 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?




You are not looking closely enough...use the "expand" button to see individual orders within each level.


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## nunthewiser (26 November 2009)

Its ok skc ........ A friend in chat pointed something out on MFG earlier that made me realise im a goose . ( i obviously did not admit this, But he will read this shortly im sure )

Alls cool , Cheers


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