Sunday 13 February 2011 9:44 pm

Think again about “no dealing desk”

PRESIDENT AND CEO, GFT Recently, there has been a lot of discussion in the business media about the “no dealing desk” model in retail forex. Let’s take a closer look at what a dealing desk is, how “no dealing desk” brokers stand up to dealers and market makers, and what you should really be looking for in your broker/dealer. LET’S GET SOMETHING STRAIGHT. THERE IS NO SUCH THING AS “NO DEALING DESK” IN AN OTC FOREX TRANSACTION – THERE MUST ALWAYS BE A DEALER (WITH A DEALING DESK) ON ALL FOREIGN EXCHANGE TRANSACTIONS. The claim of having “no dealing desk” is ridiculous. Plain and simple. Spot forex is traded over-the-counter, not on a centralised exchange, so the trade cannot occur without a dealer (or counterparty) being involved in some capacity. “No dealing desk” brokers are middle men – they get your order and pass it on to an actual dealing desk to be executed. They, however, are contractually your dealer or counterparty to the trade; they then face the other dealer with a corresponding trade. In reality, the “no dealing desk” brokers forward their trading orders to the dealing desks of others, typically a bank or other financial institution that makes markets in spot FX. So whether you know it or not, a dealing desk is always involved when you place a trade. A more accurate description of this model would be to call it a pass-through dealing desk. The pass-through dealing desk “passes” the customer’s order to another dealing desk. If this sounds like an extra middle man, it is. The elimination of the “middle men” is the main reason why over-the-counter trading has grown so much over the last 15 years – which makes it ironic that some firms are now trying to introduce middle men back into the process. It’s also important to note that a pass-through dealing desk puts all of the execution risk on the trader, but provides none of the benefits of being able to speak directly to a dealing desk. DON’T FALL FOR THE MARKETING SPIN! You might have heard in current advertising that when the customer makes money, the dealer loses – that is, the dealer is trading against the customer. If that is the case, why does it matter if the dealing desk is with the actual trading company that holds your account or another financial institution? This kind of marketing can be really misleading because in today’s regulatory environment, the concern that a dealer can only make money when their customers lose (and therefore, is actively trading against customers), is not reality. Dealing desks, whether they are with a large money centre bank, or the trading desks of companies like GFT, have one goal – make money for their firm. In retail forex, that money can come from a variety of sources. Dealing desks can make money by matching one customer order against another, sending customer orders or part of customer orders to other liquidity providers in the broader market, and also holding proprietary positions based on their customer positions. Sounds simple in theory, but the reality is quite a bit more complex and can vary customer by customer or market by market. These general ideas are manipulated and customised by dealers (also called market makers) across the industry, from major money centre banks, to GFT. All with one goal in mind – to minimise risk to their firm and make money. Dealers and consumers can both profit at the same time. Ironically, most “no dealing desk” brokers started out with direct dealing desks, but some have reverted back to being brokers instead of dealers, with a network of other, successful dealing desks to introduce their customers’ order flow to. However, they still have to make money somehow – and that is on the backs of their customers. Instead of getting their profits as a dealer or market maker would, they have to resort to other ways to find profits. These may include increasing the spread they offer customers as well as taking “payouts/rebates” from the dealing desks they use to execute customer orders – possibly in a way not favourable to the customer. Rebates mean wider spreads from the dealer/market maker which could mean a worse price for the customer. DEALING DESKS AND MARKET MAKERS CAN BE CONTACTED DIRECTLY TO DISCUSS PROBLEMS IN EXECUTION. Since the pass-through dealing desk is merely acting as a middle man in the trade and routes the order to some financial institution, the customer has almost no recourse in cases where there are problems with the trade. The broker literally “passes the buck” of responsibility, making any adjustments in favour of the customer highly unlikely. In a dealing desk model, the customer can always call the dealer directly to discuss any legitimate problems in execution. WHAT SHOULD YOU LOOK FOR IN A FOREX BROKER/DEALER? Other than spreads, what else should you be looking for in a forex dealer? Here are some other things to consider: 1. Does your broker often widen spreads during volatile market conditions? Pass-through dealing desk brokers and even some direct dealing desk brokers will often widen their spreads during news announcements, resulting in spreads that could expand to 25 pips or more, for minutes at a time. For traders who use tight stops, this “spread widening” could prove very costly, triggering unnecessary stops outs and creating missed opportunities. 2. Does your broker have a clean regulatory record? In the UK the FSA and in the US the NFA provide a full public record of any enforcement actions against the broker or its key personnel. To look up the violation records of any licensed broker simply go to: or: Generally, the better the record, the better the broker. 3. Does your broker operate from a reliable jurisdiction? Is your broker/dealer operating in a banana republic, or in areas with lax or no regulation? If so, you may have no protection, regardless of whether they claim to have a dealing desk or no dealing desk. 4. Does your broker provide a steady price feed? In currency trading, execution and service are of upmost importance. It doesn’t matter if your broker claims to offer a half-pip wide spread – it will be of little use if those prices are not executable or stable. The Internet is replete with reports of brokers whose platforms are unstable and whose prices often lag the market. Simply search “lagging price” to see what comes up. The retail forex market has made tremendous progress over the past decade, allowing thousands of investors and traders across the world to benefit from this unique market. However, when selecting a trading company, it is important to ask questions rather than accept its claims at face value. A smart trader does research before making a final choice.