Forex CFD is fast becoming a favorite investment instrument among individual investors who have a big appetite for taking risks. The small margin required to put up a CFD trade plus the same high leverage as spot forex trading make Forex CFD a more viable option to trade the foreign currency markets and take advantage of the frequent price fluctuations that inherently characterize the foreign exchange market.
But most of these traders simply plunge into trading Forex CFDs without investigating whether his CFD provider is a DMA or a Market Maker. CFD providers can be any of these two types of brokers and your choice of a brokers has is quite a big impact on your trading.
DMA are the Direct Market Access Brokers who hedges every Forex CFD order with the mainstream foreign currency market. Instead of just matching your order with an opposite trade and take the risk by itself, a DMA broker hedges it by placing an identical trade in the real market. This effectively makes trading Forex CFD with DMA brokers more like trading the spot forex market. The quotes they offer are parallel to and almost identical to the real time quotes in the underlying spot market with perhaps just a couple of tics difference at the most. In other words, they have no vested interest on your trade since they pass on the risk to the underlying market where your order is matched up.
On the other hand, a CFD provider who is at the same time a market maker takes your order head on and matches your CFD order with an opposite trade i.e. if you are the buyer the provider is the seller and if you are the seller, the provider becomes the buyer. In effect, the CFD provider would be naturally interested in every trade you make since if you lose, it wins. To extend this line of reasoning a bit further, the CFD provider would logically wish that you lose more often so they get more of your money.
While market makers will argue that no single broker can manipulate the whole forex market and influence the rates of exchange of the different currencies, it is also a known fact that market makers have the propensity to use market volatility as an excuse not to fill in your order (especially your stop loss orders) thus causing you to lose more. They are also known to have the capacity to dictate the prices and make it swing to both ways in a range in thin volume markets.
We are not saying that all Market Makers offering Forex CFDs are apt to putting one over you but it doesn’t seem right to take on an added risk especially if it involves your own broker. One of the main reasons why foreign currency market is the most popular and active financial market is its liquidity resulting from the huge volume of trade it generates daily that even dwarfs the combined volume of trades in all exchanges all over the world. Sadly, we don’t see this kind of volume yet in Forex CFD trading. Besides, when it comes to liquidity in so far as Forex CFD is concerned, it is solely based on the liquidity of the company you are dealing with.
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