Questions on CFD brokers's business model

[monktrader]

I read on wiki that there are two business models , MM, and DMA , then I read here something about one broker doing synthetics vs the other being DMA . Is that another system used by brokers? Or is that just MM hedging with swaps or something ?

I was interested in Saxo but they say DMA is only for big accounts, and there is no real difference between MM and DMA on their platform except for the fact that you can reduce the spread. With the DMA system you place your own orders in the underlying and as soon as you get an execution a CFD is created, right ? Who owns the underlying then ? The broker ? How do they finance the transaction ? At LIBOR and you pay LIBOR + X % ? Is that how it works ?

Finally I was wondering how stops were triggered, off the underlying price or off the bid and ask of your broker as with FX brokers for instance ? Or is it the last trade on your broker's platform that triggers the stop ? If they can trigger stops, I would not want to trade with them , must be very easy to manipulate stops with equities.
Thanks for any info you have , regarding things to look for when considering brokers . The CFD market looks a bit confusing to me.

 

[monktrader]

Also a dumb question perhaps , in the DMA model, since an actual purchase of the underlying is made, who pays the stamp duty ? Doesn^t it have to be paid by someone ?

 

[foredog]

I'll try and answer a few bits,

I used Etrade for CFD (think they are same as saxo) and didn't bother with the DMA as with most FTSE 100 stocks that they are liquid enough so don't need to have limits up. So you save on the commission. A lot of the time they seemed to automatically cover the position in the market.

Who owns the stock...them, you are just making a contract to pay the difference between your entry and exit.

The financing would be LIBOR + some if you're long but they won't pay you a thing if you're short in interest.

Also there i no stamp, as a member of the LSE they don't have o pay stamp and as you're only making a contrat there is no stamp.

Stops were triggered once a stock has traded at your stop...eg if your stop is at 250 then when they trade on the order book at 250 then your order will trigger....so if the whole bid is hit then you may end up trading at 249.5 or something. I never felt they were hitting bids to stop me out, too much effort considering how many stops they probably have and also if you've got a 25p stop and it trades down 24.5p chances are that trades a loser anyway.

 

[CFDplayer]

I'll try and answer a few bits,

I used Etrade for CFD (think they are same as saxo) and didn't bother with the DMA as with most FTSE 100 stocks that they are liquid enough so don't need to have limits up. So you save on the commission. A lot of the time they seemed to automatically cover the position in the market.

Who owns the stock...them, you are just making a contract to pay the difference between your entry and exit.

The financing would be LIBOR + some if you're long but they won't pay you a thing if you're short in interest.

Also there i no stamp, as a member of the LSE they don't have o pay stamp and as you're only making a contrat there is no stamp.

Stops were triggered once a stock has traded at your stop...eg if your stop is at 250 then when they trade on the order book at 250 then your order will trigger....so if the whole bid is hit then you may end up trading at 249.5 or something. I never felt they were hitting bids to stop me out, too much effort considering how many stops they probably have and also if you've got a 25p stop and it trades down 24.5p chances are that trades a loser anyway.

One question to Foredog,

Where can I find the info about Stamp Duty is not applied for LSE member?

Cheers,

 

[dodge149]

There are two expemptions to stamp duty and they are if you are a market maker, or a broker dealer. However CFD's dont have stamp duty as you dont take actual ownership of the shares... It is just an agreement between you (the trader) and a regulated dealer for the difference between the opening and closing price of a particular financial instrument (or equities).

 

[dodge149]

http://www.hmrc.gov.uk/si/2009-0397.pdf