Market Maker (MM) and Direct Market Access (DMA)

Market Maker (MM) Traditional Pricing Model whose quoting spreads often do not mirror pricing on underlying products.  (Prices does not reflect real market) Using CFDs as an illustration, a stock price (CFD) is $1.56.  The spread of this stock could be $1.50/ $1.60. The buyer needs to buy at a higher price of $1.60. ($0.04 difference) The seller needs to sell at a lower price of $1.50. ($0.06 difference) MMs usually charge cheaper commissions but earn additional money through the spread between bid and ask prices. Therefore, one tends to lose more when trading size gets bigger. Thus it is important to find out about the spread and look beyond what the cheap commission suggests. For forex trading, the thinning spreads for MM may could be enticing to the trader, but kindly refer to the following pointers to have a better picture. Considerations of engaging a Market Maker, MM: 1.  Stops could be triggered a distance from traded market prices (higher chance for client to be hunted for stops, although depending on the broker) 2. Possible for MM to trade against clients 3. Slippage could happen even in an orderly market 4. Prices could be jittery – spikes beyond regular market volatility (during extreme trading market conditions or illiquidity) 5. Chances of (wrong feed, price not working etc) 6. May be paying for data feeds (irrelevant as they are market makers)   Direct Market Access (DMA) Pricing model mirrors pricing on underlying products. DMAs follow the actual bid/ask price quoted in the exchange and they surface your CFD orders on the exchange. Thus, your orders would contribute to the volume in the market. Since they do not really earn from the bid/ask spread, they charge a higher commission. Usually charge data fee because they pull live data from the exchanges and it is the latter that charges for the data. It is just a matter of transferring the cost to the user. Can have a better feel of market direction as the spread is thinner, thus offering a better pricing transparency than MM. Pricing is same as exchanged-based buying and selling prices. Using the same example as the MM, the buyer and seller can buy and sell at $1.56 respectively excluding commission. DMA has a higher probability for the trades to be executed based on the tighter and 'cleaner' spread. Also, DMA has a faster executing response than MM. Time is precious especially if the directions of a trade can turn within seconds. Sometimes commission is built into the spreads of the DMA and MM or a separate commission is charged along with other fee such as market data fee. Conclusion It is our desire to educate the public on the MM and DMA pricing modelling so that they can make better informed decision. Overall, DMA is a better model but clients may be attracted by the 'lower' commissions of MM. Users' experience of the MM and DMA may also differs across brokerages and their trading strategies.   Disclaimer The above are provided for general information purposes only. Kindly email me @ weely.soo@grentone.com if there is any feedback. Thank you.

Samuel Tay