Dealing desk or no dealing desk?

That is not the question, it’s what you need to know.

For years, one of the main things to keep in mind when choosing a brokerage, was whether the broker operated with a dealing desk or without one. Choosing one type of broker over another was somewhat simple and understanding the trade structure of a broker and making a decision on who to go with, only depended on how comfortable a trader felt with the level of risk provided.

Basically, dealing desk brokers, also known as market makers, offer fixed spreads and simulated quotes, and are defined by the fact that they take the opposite side of a trader's trade and fill orders on a discretionary basis. No dealing desk, otherwise known as straight through processing (STPs) brokers on the contrary, have variable spreads on most cases, quote prices directly from liquidity providers, serve only as a connector between a trader and the liquidity provider, and fill orders automatically, without re-quoting.

Having this in mind, day traders typically chose the tighter spreads, while long term traders preferred wider spreads.

In recent times however, corporate synergy in the risk management and prime brokerage sector, as well as numerous mergers and acquisitions between large brokerages and liquidity providers, have made things less clear than crystal.

As recent as last month, one of the US’ largest Forex firms, FXCM, ceased operations in the USA after the NFA filed a complaint accusing the broker of routing orders of the no dealing desk model, through a dealing desk served largely by liquidity provider Effex Capital, a firm that although represented as an independent entity, was in fact controlled by FXCM.

Dealing desk brokers are not all bad however. The main reasons why traders don’t feel comfortable with using money managers, are firstly, the fact that often times, the broker is on the other side of the transaction taken by the trader, actively trading against the trader, causing a significant conflict of interest (your broker essentially makes money when you lose). Secondly, you may see delays in getting your orders filled, since every order needs to be approved manually. In times of high volatility, a delay in getting your order actioned may mean a slip of a few dozen pips. In an ideal FX universe however,  a  market maker should be indifferent to the decisions of an individual trader, since they fill both the buy and sell quote for clients.

Once upon a time, deciding for one brokerage over another based on the type of trading structure they offered may have been all a trader cared about, but today, with the landscape of the industry changing as rapidly as currency prices do, and the Forex sector holding a reputation tainted by some companies’ grift, things are not as black and white as they once were. Today, to ensure that what a brokerage is promising is in fact what it is delivering when it comes to its trading system, traders would be wise to read not only the fine print, but also to read between the lines. 

All essays, research and information found above represents the analysis and opinion of Adinah Brown, financial journalist at Leverate only. As such it may prove wrong and be a subject to change without notice. Opinions and analysis were based on data available to the author of her respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Adinah Brown does not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Adinah Brown is not a Registered Securities Advisor. By reading Adinah Brown’s reports you fully agree that she will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investment trading and speculation in any financial markets may involve risk of loss.