Articles of Interest

There are a number of different types of forex brokers, market makers, fixed spread providers and those offering electronic communication networks (ECN's). A common question asked which most people new to forex ask is which type is best. To help answer this question below is a brief comparison.

Fixed Spread Providers
There are quite a few fixed spread forex brokers in Australia some have spreads as low as 2 pips on EUR/USD. Trading on a fixed spread can have its advantages as well as disadvantages. One of the main advantages of trading on a fixed spread is that traders are guaranteed consistent spreads during times of market volatility such as interest rate announcements; these are often the periods during which spreads can widen dramatically without warning often catching novice traders off guard.

Despite having the benefit of a fixed spread during market volatility fixed spread providers will often quote wider spreads during quiet periods, often their spreads are much wider than those offered by market markers or ECN forex providers.

Trading on a fixed spread is often good for newbie traders who are not yet accustomed to the wild price fluctuations of the forex market.

Market Makers
There are a few market markers that have given the rest a bad name by trading against their clients and profiting from client losses, however this is not common practice for all market makers only a select few. Generally market makers are able to offer relatively tight spreads across all of the major currency pairs, however it is important to understand that this not always the case if you are looking to trade large parcels or trade around announcements such as interest rates or non-farm payroll.

Some market makers are known to widen their spreads by as much as 50 points during times of market volatility, they often do this to protect themselves from scalpers looking to take advantage of their tight spreads.

When selecting a forex broker who is a market maker you will need to ensure that you do your homework and make sure that they are not one of the few that are actually trading against you and profiting from your losses.

ECN Providers
By far the most transparent forex broker model is an electronic communications network or ECN. An ECN broker simply aggregates the best price feeds from a variety of investment banks and always displays the best bid or offer. Most ECN brokers will charge a commission rather than apply a spread to the natural market price this ensures that you are trading on the real market price as set by the world's largest investment banks.

There are many advantages of trading with an ECN broker the most apparent being the spreads offered; often there is no spread or an inverted spread, prices not achievable by market markers or fixed spread providers. During volatile times an ECN will always show the best price available, as ECN brokers rely on a number of investment banks who are actively trading over these periods you will always get the best price and not by subject to extremely wide spreads which you would otherwise get with a market maker.

Of course it is up to you type of forex broker you choose as each have their own unique advantages. You should always make your decision based on the trading strategy that you employ and your level of experience in the market.

To learn more about selecting the right forex broker you can download and read this free Forex Guide.

These days most forex brokers have been forced to offer metatrader simply as a result of customer demand. The metatrader phenomenon has taken over the world of retail forex with several online company's producing robots and plug-ins to satisfy an increasingly growing client demand for automated trading.

On the surface all metatrader brokers seem the same but have you ever wondered what makes one metatrader broker different from another?

First and foremost one of the most important decisions that you should make is whether you deal with a market maker on tight spreads or a company that hedges all for your orders. Many novice traders base their decision on price and make the wrong selection only to end up regretting it later. It's common knowledge that some metatrader forex brokers promote tight spreads in their marketing material and on their demo accounts but when you open a live trading account and go to execute a trade your spreads are sometimes very different. These providers tend to be market makers and simply quote tight spreads to attract new clients however in most cases are usually not prepared to deal on these spreads for any reasonable volume.  

So what really makes one metatrader broker different form another?
A number of providers genuinely have tighter spreads than others, some are market makers and trade against you whilst others hedge all of your trades in the interbank market, finally some use a high quality bridge between your trading platform and their main server, meaning your orders are going to be executed a great deal faster and you won't get price re-quotes. Needless to say there's not one single factor that makes one broker better than another, it is advisable to consider all of these factors together prior to deciding on the best metatrader broker.
 
It is also important to think about what base currencies you broker can hold your account in and where the broker’s offices are located. The majority of active traders prefer to deal with providers that are located in their country of residence as this has significant advantages relating to regulatory protection, service and speed of cash transfers in and out of their trading account.

Of course these are just a few of the things that you should consider, it is always advisable to download a number of demo accounts as well as call up the broker and ask them about their spreads and whether they are a market maker or hedge all of their trades. Most metatrader brokers will be happy to answer these queries.

To learn more trading forex on metatrader you should download a free Metatrader Demo.

There are two main types of CFDs, direct market access (DMA) and market made (MM). The most popular type is the market made variety. The reason for the popularity of market made CFDs is simply because CFD providers offering this type of CFD are also able to offer CFDs over indices and forex pairs.  DMA CFDs are typically more common with traders that are more familiar with share trading for the simple reason that DMA CFDs allow traders to participate in the opening and closing phases of the market and also the order book of the underlying security over which the DMA CFD is based. Both varieties of CFD have their place amongst traders and investors and it is important that you choose the type that suits your trading style.

It is not uncommon for day traders and scalpers to utilise DMA CFDs rather than the market made variety as their orders flow directly onto the exchange and there is no market maker intervention meaning that order execution speed is often quicker with no risk of being re-quoted.  DMA CFDs are also favoured because day traders are able to participate and influence the opening and closing match price. The opening and closing phases of the market are the most liquid and of course liquidly is essential in any effective day trading strategy.

Often day traders also have CFD trading accounts with CFD providers offering the market made variety. The reason for this is because day traders like to monitor the movement of the cash indices, in addition to being able to trade them. Market made index CFDs are a cheap simple alternative to trading the actual futures contract which generally requires a higher upfront margin.

Some CFD providers offer both DMA and market made CFD from the same platform, this is the preferred solution for active day traders as it means that their DMA share CFD positions can be cross margined against their indice and forex CFD positions. Having both DMA and market made CFDs in one account also saves allot of paperwork as only one account needs to be managed, making the preparation of tax returns much easier.

Day traders often use both DMA and market made CFDs in their trading strategy, CFD providers who only offer market made CFDs refer to these traders as snipers as their strategy revolves around taking advantage of price discrepancies between DMA and market made CFDs. Such discrepancies often occur during the opening and closing phases of the market as it is during these phases that there are significant price changes, some of which may not be accurately reflected in the price of the market made CFD.  These pricing inaccuracies can result in arbitrage opportunities for shrewd traders.

It is important to note that each and every trader has their own trading style, some styles are better suited to DMA CFDs and others to the market made variety. Before making the selection between DMA or market made CFDs you should consider your trading style and determine whether the speed and accuracy of DMA CFDs or the versatility of the market made variety is better suited to you.

To find out more about trading CFDs you should download a copy of your free CFD Guide.

There are two main types of CFDs, these are:

1. Direct Markets Access and;
2. Market Made

Some CFD providers only offer one type of CFD others offer both. The most common type of CFD is the market made variety, typically this type of CFD is offered by CFD providers that also offer spread betting and originate in the United Kingdom where spread betting is popular.

All CFD traders or potential CFD traders should understand the differences between the mechanics of both types of CFDs and the fee structures associated with them.

Direct Market Access (DMA) CFDs
Direct Market Access (DMA) CFDs mirror the price and liquidity of the underlying instrument on which the CFD is based. DMA CFDs are the most fair and transparent type of CFD available. When trading DMA CFDs the trader is a "price maker". DMA CFD traders can enter and see an equal order flow onto the underlying exchange, this guarantees that at all times they receive true market prices on every trade. DMA CFDs offer traders real time execution, guaranteed market prices and participation in the order book and opening and closing phases of the market this provides a significant advantage for scalpers.

DMA CFD providers do not profit directly from performance of the CFD trader, as all CFD positions are 100% hedged. This means that if you buy the CFD, the provider will instantly buy the underlying equity as their hedge trade. 

Points to note
• The quoted price of DMA CFDs is the same as the price quoted on the underlying exchange;
• DMA CFD orders flow directly onto the underlying exchange;
• DMA CFD traders can be a price takers or makers and participate in the market depth on the  exchange, and;
• DMA CFD traders can participate in opening and closing market auctions.

Market Maker (MM) CFDs
A Market Made CFD does not mirror the price on the underlying market. Market Makers that offer Market Made CFDs derive their CFD prices from the underlying instrument on which the CFD is based rather than quoting the exact exchange price of the instrument like DMA CFD providers. Market Makers act as an intermediary to the CFD trade and have the ability to alter the price of the CFD, price alterations often occur in their favor, often resulting in stop orders being triggered and slippage which can add a significant cost to the trade.

Market Makers do not hedge 100% of their CFD positions, typically they hedge only the resulting amount after their clients long and short positions net each other off, however in many cases they do not hedge at all and often directly profit from their client’s losses. When trading Market Made CFDs trades do not flow directly onto the exchange, they are at the discretion of a dealer as a result orders are filled slower and at inferior prices.

Points to note
• MM CFD traders do not receive the same prices as those quoted on the exchange;
• MM CFD spreads are often widened and orders re-quoted;
• Market Makers are price takers not price makers, this means MM CFD traders cannot participate in the underlying order book;
• MM CFD traders cannot participate in the opening and closing market auctions and;
• Some Market Makers profit from the performance of their clients positions.

Market Made CFDs do have some benefits over DMA CFDs in that they are generally offered over a larger range of stocks and indices. Market Makers are also able to offer additionally liquidity in larger stocks, the reason for this is because they have positions on their internal order book which they would like to clear.  

Market Makers often re-quote clients when they attempt to buy or sell a CFDs, re-quotes occur as a result of the Market Marker adjusting their internal order book to compensate for a lack of liquidity at a particular price level on the underlying exchange.

So which type of CFD should you choose:
When comparing the two types of CFDs you should consider whether you’re trading style and the instruments that you trade suit either a Market Made or Direct Market Access model. Typically scalpers and active traders choose DMA CFDs over MM CFDs as there are no re-quotes and the trader can be a “price maker” through participating in the underlying order book of the stock which they are trading. Market Made CFDs are popular with longer term traders and those that prefer to trade indices and forex. The reason for this is than often Market Markers offer both indices and forex commission free. Often DMA CFD providers do not offer indices and forex on a DMA basis as by their very nature they are a market made product and cannot be traded on an exchange.

Before choosing a CFD provider you should analyse your trading strategy and choose the type of CFD that suits you best. If you are unsure of your trading strategy or would like save the hastle of having multiple CFDs account with multiple providers you should choose a CFD provider that is able to offer you both Market Made CFDs and DMA CFDs.

Other types of CFDs
It is also worth noting that there is a third type of CFD, these are exchange traded or ASX CFDs and are offered by the Australian Stock Exchange. ASX CFDs are not popular amongst traders or investors due to their lack of liquidity and wide spreads. ASX CFDs are only offered over a small range of securities, indices and foreign exchange pairs. ASX CFDs do have the benefit of being cleared and traded on an exchange however as there are no significant advantages of this type of CFD traders prefer either the Market Made or Direct Markets Access CFDs. 

With some CFD providers you can trade either Market Made CFDs or Direct Market Acess CFDs.

To find more helpful information on CFD trading you can download our free CFD Guide.