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One of the most important features of CFD brokers is the market model underlying the trading of contracts for difference.
The numerous providers differ fundamentally in this point and can be classified in principle into two groups. On the one side are market makers, on the other side are DMA brokers.
Market makers place themselves in the opposite position to their customers. When a client opens a long position in a CFD, the market maker automatically opens a short position, as he always quotes buy and sell prices and executes client orders at these prices. It is irrelevant for the assignment of a broker to the group of market makers whether or not the risk associated with the position is immediately neutralised by a matching counter position on the financial market.
Find the right CFD broker
CFDs work with levers. Our comparison will show you which CFD brokers are particularly safe thanks to measures such as the exclusion of a margin call or guaranteed stop-loss orders:
Market Makers and Conflicts of Interest
Trading via market makers is associated with the problem of latent conflicts of interest. Investors cannot understand from the outside what exactly the broker does to earn his money.
In principle, it is possible for client orders to be netted against each other and for overhanging net positions to be hedged externally. It is even possible in principle that the prices quoted by a market maker correspond to those of a regulated reference exchange.
However, this is not the rule. Rather, market makers set the buying and selling prices at their own reasonable discretion.
They are also free to include market risks in their own balance sheets at their own discretion and thus to take up the opposite position to their customers not only technically but also economically. Losses of customers then lead to profits for the broker.
To put it bluntly, a market maker maximises his profit if he allows his clients to trade at the worst possible prices from their perspective.
DMA Broker: Trading at the prices of the reference exchange
DMA Brokers offer considerably more transparency. DMA stands for “Direct Market Access” and describes a market model in which CFD brokers grant their customers access to the order book of a reference exchange or several reference exchanges.
Technically, this is achieved by mirroring the order book (Level II) on the broker’s servers, which is ideally connected to the exchange via a dedicated line. Customers of a DMA- CFD Broker can place orders in the mirrored order book and follow their progress in detail.
The broker legally executes the order in real time in his name on the reference exchange and at the same time generates a contract for difference between himself and the customer. This rules out conflicts of interest: it is ensured that the broker generates profit margins exclusively by remunerating his services in the narrower sense.
Order execution at the best possible prices
Ideally, a DMA Broker does not limit itself to a reference exchange, but automatically forwards customer orders to the (regulated) trading venue where the highest liquidity is available.
This minimizes bid/ask spreads and improves results. Market Makers can undoubtedly be suitable for beginners who are getting their first experience in CFD trading and who initially trade relatively small amounts.
At the latest when the demands on the results increase and trading with larger sums of money, however, the change to a DMA Broker is worthwhile.
Risk note CFD trading
Trading CFDs involves considerable risk and can result in the complete loss of your entire capital investment. There may be account types where losses may exceed the capital invested. Leveraged CFD trading may not be suitable for you! Therefore, please read more about how CFD trading works. You should not use funds that you could not afford to lose in the worst case. Make sure you understand all the risks involved in trading CFDs. The content of this website should NOT be misunderstood as investment advice! We recommend, if necessary, that you seek independent advice.
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