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Dealing Desk vs No Dealing Desk – Which Is Better?

by patrickhaynes

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Traders are confused as to which mode of trade is more profitable, useful and more importantly secure when trading in FX. There are basically two modes of executing trades – the traditional Dealing Desk (DD) and the No Dealing Desk (NDD). Let's understand the concept before jumping the gun and deciding which is safer territory. In short the different trading styles depend on how the counterparty (your FX broker) you trade with deals with your order, on the one hand you have the broker method where by the broker is a broker and acts as an agent, passes your trade to the main market. On the other side of the spectrum you have your FX broker who acts as principal on the trade, in essence the order is held on the broker’s book.

As you know, to trade in the forex market, you need to open an account with a broker. These brokers, depending on the scale of trade, will either offset the risk to a counterparty and transfer the trade to a larger institution or instead assume the risk themselves, keeping the order on their book.

Dealing Desk Brokers

These forex brokers also acts as a counterparty to the customers through their trading or dealing desk (DD). Such a forex broker or dealer is also called a market maker since he/she makes it possible for the customers who are desirous to sell/buy and those wanting to buy/sell to the forex broker trade. In this sense, the forex broker sits on the opposite side of each trade with a customer. While customers have the benefit of consistency in terms of market availability, they do not see quotes from other counterparties and therefore aren't informed about the differently quoted prices from those of the interbank market.

What is NDD?

No Dealing Desk brokers act as a bridge between a client and the larger players i.e. banks, mutual funds, hedge funds etc. There are two types of NDD brokers- STP and ECN.

A straight-through-processing (STP) forex broker is one that does not have a dealing desk but instead passes the orders from customer {to buy/sell} directly to one or several third parties of the interbank market who then become the counterparty to the customer's trade. In general, the greater the number of third-party participants, the better will be the liquidity and pricing to the customer.

The second type known as Electronic communications network (ECN) forex brokers are straight-through-processing brokers that, in addition to routing customer orders to the interbank market for execution, will also allow their other customers to become a counterparty to a transaction. In essence, the ECN forex broker provides a marketplace where all of its participants (banks, market makers and individual traders) trade against each other by sending competing bids and offers into the system. The highest bid and lowest offer are shown and trades are executed. Some ECN forex brokers even display the depth of the market in a data window that shows the order size accompanying the quoted bid or offer.

Forex brokers earn income through their own trading activity and through the quotes provided to customers which may be widened or even shifted from those of the interbank market. STP forex brokers essentially have two ways to earn income: by increasing or marking up the bid/ask spread (without directional bias) shown to customers or by charging a commission. ECN forex brokers usually charge commission for trading forex since they earn no income on the bid/ask spread. In the United States, regulations require that the forex broker disclose the fee structure to the customer prior to opening an account.

The choice is?

So, the question – which is better NDD or DD? From one point of view, while executing trade through the DD mode, there is a chance that the broker who also happens to be a counterparty can play game against you on account of his/her vested interests. However, the answer is, in spite of the negative reputation that the DD system has gained over the years, it still is an option worth pursuing. The reason is that the chances of getting duped are equal in both the systems. The points worth remembering when choosing either system should be based on the reputation of the broker, the benefits and the quality of services on offer. There are several websites and online forums that you can refer so as to get an idea of the market to make a sound choice. Still if you are not sure about the DD system, then the way forward is the automated system considered to be fair and transparent.

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