Understanding Dealing Desk: What It Is and How It Works

Dealing desks allow market makers to trade financial instruments, but can have conflicts of interest with clients. No dealing desk options connect traders directly with liquidity providers to avoid these conflicts.

Basics

A dealing desk is where market makers trade financial instruments like forex, equities, options, and commodities. Dealers can act as principals, taking the opposite side of their customers' trades, or as agents, finding liquidity in the secondary market for clients' orders.

A Closer Look

A dealing desk, located within banks or financial institutions, is where forex dealers trade foreign currencies. These desks exist globally due to the 24-hour nature of the forex market. Besides forex, dealing desks are also present in banks and finance companies to execute trades in equities, ETFs, options, and commodities.

Dealers Roles

Dealers on these desks serve customers by acting as principals or agents. As principals, they take the opposite side of their clients' trades, either by taking on risk or using their own inventory. As agents, they find liquidity in the secondary market, providing clients with the same prices they received from the dealer.

Forex Dealers Decrease

With the advent of electronic trading, the number of forex dealers on desks has significantly decreased since the late 1990s. Nowadays, a typical forex desk may have less than ten traders, with many processes automated through electronic platforms. The same applies to equities and ETFs.

Dealing Desks Location

Dealing desks are generally located close to sales desks and market risk desks. The market risk team monitors positions and calculates the value at risk (VAR) daily to assess the bank's risk exposure.

Advantages and Disadvantages of Dealing Desks

Dealing desks can provide traders with access to liquidity and a wide range of financial instruments. They also offer tight bid-ask spreads and often allow for custom orders. However, dealing desks may have conflicts of interest with their clients, as they can take the opposite side of their trades. This can lead to slower execution times and requotes during high volatility periods.

To avoid these conflicts of interest, some brokers offer a "no dealing desk" (NDD) option. NDD brokers use an electronic communication network (ECN) or straight-through processing (STP) to connect traders directly with liquidity providers, eliminating the need for a dealing desk. However, NDD brokers may charge higher commissions or spreads than dealing desk brokers.

Both dealing desk and NDD brokers can be either retail forex brokers or institutional forex brokers. Retail brokers cater to individual traders, while institutional brokers serve large financial institutions like banks and hedge funds.

Conclusion

Dealing desks are a vital component of the financial markets, providing traders with access to liquidity and a wide range of financial instruments. However, they also come with potential conflicts of interest and slower execution times. As such, traders should carefully evaluate the advantages and disadvantages of dealing desks versus no dealing desk options before choosing a broker.