CFD Providers

Not all CFD providers are created equal. In Australia, there are three types of business models: market maker model, direct market access (DMA) model, and exchange-traded model.

Market Makers

CFD providers who are market makers provide their own prices for the underlying assets (shares, indices, commodities, Forex, etc.) on which CFDs are traded. The price they offer may or may not differ significantly from the market price.

Market makers may or may not hedge the CFDs they offer, but these arrangements are usually less transparent than DMA providers. If they don’t hedge all CFD trades, they may have a business model that allows them to benefit if you lose.

Direct Market Access

DMA CFD providers place your order into the market for the underlying asset; hence your price will be determined by the underlying market. DMA CFD providers do not carry any market risk from the trade, so they will only offer CFDs on an asset if there is sufficient trading volume in the market.

DMA providers hedge all client trades in the underlying market, meaning that if you place a CFD trade, the provider will make a corresponding trade in the market. In the case of shares, if you pay a margin to go long on share CFDs, the provider will buy the corresponding shares. This makes the CFD pricing and trading process more transparent, though it means the number and types of CFDs that are offered are more limited than those of market makers.

Both Market maker and DMA models are both provided over-the-counter, meaning there is no central exchange, so CFDs are traded directly between the provider and the client. Over-the-counter also means that there is no central regulation, and each CFD provider has its own terms and conditions.

Many CFD providers offer both market maker and DMA CFDs.

Exchange Traded Model

CFD providers who use an exchange-traded model offer CFDs that are listed on the ASX – this model is unique to Australia. ASX-listed CFDs can only be traded through brokers authorised to trade them.

The terms and conditions of these CFDs are standardised by the ASX, which may reduce some risk. ASX 24 is responsible for registering, clearing and processing all trades in ASX exchange-traded CFDs, and the seller and the buyer contract with ASX 24 rather than each other. This means that ASX exchange-traded CFDs have a lower level of counterparty risk than over-the-counter CFDs.

The market for these CFDs is separate to that of the underlying assets, which means that CFD prices are determined by trading activity, rather than by the price of the underlying assets. Usually the CFD prices closely follow the market price of the asset, though there can be divergence if liquidity dries up.

Which is best?

Market makers and DMA providers are quite similar in that they are both over-the-counter CFD providers. However, the main difference between them is transparency. DMA providers are much clearer about the breakdown of the cost of trading, and you know that your trades will be hedged in the market. I prefer DMA providers, or providers who offer both DMA and market made CFDs, as market makers may profit from their clients’ losses, and I’m uncomfortable trading with a provider whose business model makes profits from my losses.

The exchange-traded model is a different matter to consider, and may suit those who want to trade with higher regulation and security. However, as this style of CFD trading is only available in Australia, if you decide to trade from another country at some point you won’t be able to continue using the same model.

Learn How to Ignite Your Economy

How would you like to be financially free? That is my goal! Recently I completed an excellent energizing six week on-line course on financial literacy and steps towards financial freedom. Financial freedom is defined as stepping away from your work, living comfortably, and having enough residual income to pay bills and expenses. Working in a successful business and having no time to spend your money, is not financial freedom, even with mounds of money coming in. Having people run your business successfully so you work when you want to, on the other hand is financial freedom. I learnt there are other ways to become financially free, but that is a topic for a later date. Today I will address three areas of my personal learning.

My focal areas of exploration will include the external world of my economy, the internal world of my economy, and my personal self care so I am around to enjoy my financial freedom. These are three aspects that I personally found most helpful for my financial growth. What is external financial growth? How did this help me? External financial growth defines the basics of my financial economy. A few activities include keeping a daily tracking sheet of every penny I spent for the month, and creating a personal budget from that spending sheet. The tracking sheet led to an interesting phenomenon because as soon as I realized I was writing down my expenses, I became more frugal with my spending. I quickly noticed areas that I could further cut down. The budget was easy to create because it was a fill in the blanks sheet. These activities helped me curtail free spending that put me into debt that could have been avoided in the first place and kept future spending on track. The internal world of my economy was a little more involved and surprisingly more difficult.

My internal economy was much more complex because I had to take a hard look at areas like motivation, goal setting, procrastination, and gratitude. Motivation and goal setting are natural concepts for me but being honest about procrastination was a little more difficult. I was not aware that procrastination involved unconscious tiredness, illness, and even injury. Times of tiredness were really procrastination moments that appeared, so I could allow myself to delay a project I was fearful to tackle. When I suddenly found housework joyful and a priority, it was a delay tactic. These are only a few examples. The gratitude exploration became another taxing experience as I was not especially grateful for all aspects of my life. Letting go became difficult, even when I was the main beneficiary. Another area of personal growth was my self-care.

My personal self-care was an area I had to look at candidly and with brutal honesty. Was I really doing everything to keep my body from deteriorating? Were those extra pounds I had put on slowing me down and adding to my knee twinges that I was periodically experiencing? Was I really exercising as much as I needed to be? Skipping my yoga sessions every now and again, was that excusable? Tracking exercise and eating has its benefits with similar findings to tracking expenses. Tracking food consumption and exercise can easily be forgotten within a busy life style but writing them down helps keep you focused so that you remember. I found I ate less and exercised more. Personal growth is difficult but very rewarding when you go for the experience in spite of the other side of you saying quit, Irene, and watch that sitcom. The more difficult the task, the more joyful the completion. John Maxwell wrote, the best investment in the future is a proper influence today. I learnt my proper influence today and my investment in the future, is my learning of business literacy! Learning, one step at a time is my progress to financial freedom.