What’s the difference between Direct Market Access (DMA) trading, spread betting & CFDs?
If you’re a trader and are considering upgrading from spread betting to a DMA broker here is a quick summary of the main differences and if it really matters.
DMA is not tax free
One of the main advantages of using a spread betting broker for trading is that profits are tax free. As your trades are structured as an amount per point move bet they are not subject to capital gains tax. So if you are a profitable trader acting in a personal capacity you have to weigh up whether or not paying tax on profits is more important than direct market access. You can’t trade DMA through spread betting, you will need a CFD broker.
DMA prices are much tighter
This is true, with DMA you get direct market access to the underlying exchange. So if for example you are looking at trading Anglo America on the LSE the prices are: DMA: 644.5/644.8 versus Spread betting (IG review) 644.5/646. But with DMA it actually gets better because you can put your buy or sell orders inside that spread to make the prices even tighter. Obviously, if you want to buy at 644.6 instead of 644.8 (as is offered) and there are no sellers you won’t get filled. But you do have the opportunity for better pricing.
No admin versus DMA commissions
One of the great things about spread betting is that all the costs are built into the spread. But with DMA, your broker will charge you a commission as an extra line on your statements. You also have to manually factor this into your profit and loss when you open and close the trade. Direct market access also comes with high minimum ticket commissions so if you are a small trader it’s not worth it as the minimum commission for DMA will probably be around £10 in and out so if you’re planning on scalping you’ll have to make more than a few points to break even.
Trading with direct market access (or DMA) enables you to place your orders direct with the exchange through a broker. Which means instead of having to buy at the offer (the higher price) and sell at the bid (the lower price) you can be the bid and be the offer.
So you work limits and buy at the lower price and sell at the higher price.
Of course, this is only the case if there is a seller willing to hit the bid or a buyer willing to lift the offer with market orders.
If you are trading with spread betting without DMA then you will have to buy/sell at your spread betting brokers quoted prices. As the broker will widen the market spread to incorporate commission.
With DMA trading you work a limit at a price and your order is in the market, so you are filled at your price when it trades. Brokers will add a commission on the trade when you buy and sell.
It’s basically a preference thing really. Spread betting has the advantage of being neat and tidy. You see a price, you deal and that’s that. No tax, commission or admin. You just work your profit and loss from your buy and sell price