Friday, April 21, 2006

The Non-Dealing Desk: Advantages and Disadvantages

Over the past six months I've learned a lot about Forex trading platforms - the good and the bad. I hope this post, describing the advantages and disadvantages of non-dealing desk (non-trading desk) brokerage, will help clear the air. While certainly not comprehensive, I think the following hits the high points.


1. No Inherent Conflict of Interest. Non-dealing desk brokerage firms do not trade against their clients. As facilitators of trading, they do not take positions that may from time-to-time conflict with the interests of individual traders.

2. Market Access. Non-dealing desk brokers offer every trader, big and small, equal access to the interbank market. The rates (bid and ask prices) on a non-trading desk platform are not those set by an individual broker but those derived from active trading between participating banks, institutional investors, FCM's and individual traders. The process itself makes every trader regardless of size an independent market maker.

3. Anonymity: Trading is done in total anonymity - the non-dealing desk broker does not know or have a need to know your positions so stop loss orders are not/cannot be targeted for takeout when a broker has a need to meet liquidity requirements.

Note: There is a growing suspicion that dealing desk brokers spike rates to take out trades when it suits their purposes. An insider a friend of mine talked with recently, a key programmer working for a dealing desk brokerage firm on the East coast, acknolwedged that brokers spike rates of up to 10 pips on a routine basis and for a variety of reasons. Whether used to fill unbalanced trades, leverage the broker's own account, or to meet immediate liquity requirements, spiking is a fact of life and difficult to prove. Sooner or later he believes the NFA will find a way to document the practice, but until then a lot of dealing desk brokers will continue to manipulate rates to their own advantage. At this point, they don't have any compelling reason not to.

4. Pricing Intervention (Bias). Non-dealing desk broker rates as well as bid/ask prices come directly from the interbank system. They are not filtered or otherwise manipulated to maintain established (undisclosed) profit margins or spiked by the broker to gain a trading advantage.

5. Reorders. Non-existent. Traders never get "reorders" from a non-dealing desk because they serve no purpose - the broker has nothing to gain or compensate for.

6. Full Disclosure. The non-dealing desk broker's fees are limited and clearly disclosed.

7. Transparency. No mind games. What you see is what you get.


1. The Cost of Trading: A large number of traders still believe that there is such a thing as commission free trading, a myth that continues to be perpetuated by a large number of dealing desk brokers. Make no mistake, the so-called "commission free" broker generates a transaction fee every time a trade is executed.

The difference is that the non-dealing desk fee is fully disclosed; the dealing deak broker's "fees" are not. What's more, the dealing desk's offer of fixed spreads also affects the individual trader's profitability because he/she is locked out of trades when market spreads drop below the broker's fixed differential. Instead of executing a market order, the broker responds with a reorder which guarantees that broker a fixed, undisclosed profit while at the same time depriving the trader the opportunity to take maximum advantage of a pricing move.

2. Spreads are Variable, Not Fixed. The Forex is an extremely fluid market. Spreads are in a constant state of flux and when traders trade through a non-dealing desk, they may see a dozen or more banks posting rates - the most attractive appearing above all the others.

During peak trading hours, spreads can drop to zero, a fact most traders using a dealing desk are not aware of. During off-peak hours, spreads can be considerably higher.

Non-dealing desk brokers don't offer or execute trades based on fixed spreads. They charge a nominal transaction fee. Such is not the case with the dealing desk broker. Whether interbank spreads are high or low, they just boost their rates to guarantee the profits they have imputed in their fixed spreads. They also generate an undisclosed amount of income trading against their trader clients.