With market maker (MM) CFDs the CFD provider creates an artificial market, not
necessarily trading in the share market. The debate is far from over between the
market maker and direct market access (DMA) models, but some pundits believe
the DMA model is fairer. However, the market maker model does provide more flexibility,
with more stocks on which to trade, and more short trades.
One of the most important concepts to understand about the market maker model is spread. The spread is the cost of entering and exiting a financial market; the bid/offer
(or bid/ask) spread is the gap between the bid (buying price) and offer (selling price,
or ask) on any given transaction.
The market maker model gives the provider the option to create a spread on the price of the underlying index. (Market maker models allows for the creation of an artificial index which is not necessarily based on the sharemarket, but we’ll stick to a sharemarket example for now.) Let’s say a share costs $1.00 and the provider places a spread of 1c on the purchase price. This is effectively like the provider charging a 1% commission on the trade.
The spread is the trader’s biggest expense – the wider the spread the more the trader pays. So the cost of the spread needs to be considered along with commission rates.
Most market maker models have the following features:
Some of the perceived disadvantages of most market maker models include:
Read about Direct Market Access (DMA) CFDs.