What comes to your mind when you hear the word “dealing desk” and “no dealing desk” brokers?
Maybe this is something that you have not even come across in the past.
However, it would surprise me if you have been in forex trading for some time, but you have not heard of dealing desk and no dealing desk forex brokers.
This is one of the considerations you make while choosing a forex broker because it is important that you understand the trade structure you will be using.
Understanding whether you are using a dealing desk or no dealing desk forex broker could influence how comfortable you feel using the broker for the long term.
The “dealing desk” concept, as well as the “no dealing desk,” are normally used to refer to the types of brokerage models that are used in the global forex market.
The forex market lacks a physical location. It is, however, a virtual market that is made up of a network of connected computers among all participating interests in that market.
The forex market is a tiered market with a pyramidal structure.
At the top of this pyramid are the major banks that act as liquidity providers in the forex market.
Such big banks include UBS, Deutsche Bank, Credit Suisse, Barclays, HSBC, JP Morgan, Morgan Stanley, Goldman Sachs, and Citi.
They sell and buy forex among themselves as well as to other participants and thus make prices at their level.
These banks tend to operate in the interbank market.
Other participants are able to buy forex from the liquidity providers as a result.
Such participants include the dealing and no-dealing desk brokers, among others.
You should assess the structure of the forex market in a supply-chain context where there are producers, wholesalers, retailers, and consumers.
Producer — Central banks (they produce currencies).
Wholesaler — The big banks that provide liquidity.
Retailers —non-dealing desk brokers (NDD), Dealing desk brokers (DD), high net-worth clients, prime brokers, hedge funds, finance houses, commercial banks, among others.
Consumers —BDCs, individual traders, small businesses, offline end-users like tourists.
Should you be able to understand the forex market structure, as I have discussed above, you will have made great progress in understanding the way dealing desk and no dealing desk brokers work.
The reason why I have written this post is because I have received the question “can I trade forex without a broker” on several occasions. Once you understand how these forex brokers operate, you will have your answer.
What is a Dealing Desk?
The buy and sell orders in the retail forex market are executed in two ways; either by being passed to another entity that is referred to as the liquidity provider, like banks and other major financial institutions, by the broker or by being held by the brokerage itself that serves as the liquidity provider.
When a broker decides to hold the trades within and doesn´t pass them to another liquidity provider, this broker is taken to be a dealing desk broker.
These types of brokers are also called market makers since they create a market. They are way smaller than the immense interbank market, but the rates and conditions are similar.
The dealing desk brokers process trades in two ways.
- By placing clients against each other
- Hedging the trade on their own
Putting clients’ trades against each other means, for example, when client X intends to buy the EURUSD pair around 1.2673, and then client Z intends to sell the same currency pair at this level, then the broker matches them.
The broker is able to generate profit that, in this particular case, is lower than the spread offered by the no dealing desk brokers. This is because they tend to evade the spread of the liquidity provider.
If there are no opposite matching orders for a given position, the broker proceeds to match the order themselves (normally known as hedging your position).
If you wish to buy, let’s say GBPJPY around 1.36, the broker will offer it to you at this price. This means they are buying it at the same price.
There exists a conflict of interest when market makers operate in this manner. That, however, is not to mean they are working to cheat you.
The dealing desk brokers reduce the risk by spreading it among millions of trades for all their clients.
They also, at times, transfer the trades through a no dealing desk operation.
Dealing desk brokers normally give fixed spreads since they are not in the business of passing trades to liquidity providers.
The clients of these types of brokers don´t experience the interbank rates and spreads. The competition is, however, very stiff; hence they end up with nearly similar rates.
What is a No Dealing Desk?
A no dealing desk forex broker is categorized into Straight Through Processing (STP) and Electronic Communication Network brokers (ECN).
Straight Through Processing (STP)
A no dealing desk broker does not deal with the trades but instead passes the trades to the interbank market that has numerous liquidity providers that are willing to sell or buy any currency pair at any given time.
These brokers process the trades via a straight through processing (STP) system that directly passes the trades to the liquidity provider.
They neither match their clients’ orders nor take the other side of the trade.
Many brokers say they are ECN providers, but they are really STP brokers, as straight through processing brokers are the most popular in the forex market, and they serve as a link to the retail forex traders.
This happens since it is not easy for individual retail traders to make it to the interbank market.
They get the best bid, ask for the spread on this market and give it to the traders inclusive of their commission which adds extra pips to the spread.
Electronic Communication Network (ECN)
Electronic communication network brokers are very much like Straight Through Processing brokers and have a similar processing system.
They, however, don´t pass the trades to the liquidity providers that have a spread between the bids and ask prices.
They match all the participants’ buy and sell orders in the interbank market.
The participants could differ from banks to small retail traders, large hedge funds, and high-frequency trading firms.
Therefore, each participant sells and buys against each other, and the ECN system simply makes it possible for them to interact.
At times there are no spreads to the buy and sell price.
In case the ECN broker decides to charge for their service on commissions per size/trade, then you may as well see the same bid/ask price.
When the broker translates these commissions into spreads, then you are not able to see any currency pairs with the same bid/ask price.
Differences Between a No Dealing Desk and a Dealing Desk Broker
|No Dealing Desk Broker||Dealing Desk Broker|
|Serves as an execution platform and tends to pass your trades to the liquidity pool.||Serves as a market maker and therefore buys and sells to you.|
|There is no existence of conflict of interest with the dealing desk broker.||There exists a conflict of interest with the dealing desk broker.|
|The liquidity pool determines the price fill.||The chances of getting a good price fill are higher.|
|Spreads tend to vary depending on the liquidity provider that is being used.||Tends to charge a higher spread.|
|Trade executions of all types are allowed.||It is common for a dealing desk broker not to allow trading around news releases.|
|As a trader, you will be charged a commission for every trade, and in some cases there will be a charge for the spread too.||The only fees you are expected to pay is the spread.|
Now you are aware of what is a dealing desk broker. For the people asking how to trade forex without a broker, you can see how this is a daunting task for a retail trader.
Ensure to know the kind of forex broker you are getting in bed with at any given time. From the above information you can easily make a decision whether you want to get involved with a dealing desk or no dealing desk broker.