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There are two different types of CFD models, Market Maker and Direct Market Access. Each type has its own advantages and drawbacks and each CFD provider makes money in a very different way. It is essential to become familiar with how CFD providers make money when you trade. In this short article we will focus on Direct Market Access or DMA CFD providers only.

Direct Market Access CFDs are one of the most transparent variety of CFD available, the main reason for this is basically because DMA CFD providers hedge each order they receive from their clients in the underlying market. When buying and selling DMA CFDs you will actually see the CFD providers hedge trade in the order book of the equity listed on the underlying exchange on which the CFD is based.

In order to hedge in a cost efficient way and enable the DMA CFD provider to offer CFDs on foreign exchanges the DMA CFD provider will utilize the execution services of a global investment bank that has exchange memberships globally. Having a relationship with one execution provider also permits the DMA CFD provider to achieve economies of scale resulting in lower execution and financing costs for the provider and ultimately the end client.

The international investment banking institutions offering the DMA execution into the underlying exchange on behalf of the CFD provider also supply the financing on the positions, this execution and financing service combined works much like a CFD but on a far bigger scale. The CFD provider’s hedge transactions with the investment bank are often called SWAP transactions and the service offered by the bank is called prime broking.

A DMA CFD provider model is simple, aggregate as many client orders and positions as possible in order to achieve reduced execution and financing rates on the SWAP contracts offered by their prime broker.

CFD providers make money much like any business where the business owner buys through the wholesaler and then sells the product in stores to retail customers.

The formula is simple, if your CFD provider is charged 0.01% commission on their SWAP trade and pay a financing rate of 0.50% above or beneath the RBA rate any they charge you 0.10% commission for the trade and 3.00% over or below the RBA rate they’ll make money. Along with earning money on commission and financing DMA CFD providers also obtain the advantage of netting all client positions against each other. Put simply netting means that if a long position offsets a short position the CFD provider has no position, however, as the client who is long is paying interest and the customer who is short is being paid interest less a small haircut, the CFD Provider profits through the difference between both interest rates.

It is imperative to note that prime brokers won’t deal with retail clients themselves and will normally only deal with large hedge funds and CFD providers, as such CFDs are a great way of achieving access to global markets in much the same way as the international investment banks themselves and hedge funds do.

With the rise in popularity of share trading by Australian investors, it’s not surprising that more sophisticated trading platforms and products are being actively used by experienced investors looking for extra trading opportunities. Contracts for differences, or CFDs, are a growing in popularity in the Australian market. CFDs are derivative products whose main attraction is the high quantity of leverage they offer. Those with a strong knowledge of financial markets are drawn to CFDs, because of their ease of use and simplicity. Often CFD traders are retail clients, institutional investors, hedge funds, day traders or the more sophisticated investors. CFDs, however, are not for the inexperienced trader or investor.

With shrewd traders aware of costs and their impact on bottom-line profits, the question arises as to which CFD provider offers better value. Yearly Cannex Canstar analyses products from CFD providers in Australia to compile its comprehensive analysis on CFD trading. CFD providers are assessed according to part-time traders and full-time traders utilizing the Market Maker and Direct Market Access trading models. Cannex Canstar doesn’t include newbie investors in their comparison, as they don’t believe this product is suitable for this sort of investor.

When assessing the CFD providers in Australia, consideration is given according to their pricing for Australian equity CFDs, this comprises of brokerage and financing charges. Cannex Canstar also takes into consideration the features and flexibility of using their services, risk management tools, as well as their margin requirements. The Cannex Canstar methodology comprises of 200 pieces of data, making the scope of their CFD trading star ratings far more than most traders could hope to compare by themselves. Their evaluation is dependent on CFD trading of ASX share CFDs. Cannex Canstar also gives bonus points for having access to indices and other markets.

The Cannex Canstar rating considers the trading platform and services offered by CFD providers, incorporating order fulfillment, charting capabilities, customer support, education, account management, information, range of tradeable securities, commission, interest costs, etc. It is not a score of expected returns from use of these services and by no means implies that an investor should have an expectation of positive returns. CFD trading is a self-managed activity and return of profits or losses is dependent upon the individual investor’s judgments and behavior.

Previous winners of the Cannex Canstar awards which are broken down into two different types being Direct Market Access (DMA) and Market Maker have been First Prudential Markets and IG Markets for their Direct Market Access (DMA) offering and GFT and IG Markets for their Market Maker CFD product. The newest contestant in the CFD market, International Capital Markets (IC Markets) is poised to take out the Cannex Canstar CFD awards this year with its discount Direct Market Access CFD package for full-time traders on the webiress trading platform.