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What is a Dealing Desk? What is a Non-Dealing Desk? What's the difference?

What is a Dealing Desk? What is a Non-Dealing Desk? What's the difference?

The concepts of a “dealing desk” and a “non-dealing desk” are usually used in reference to the kinds of brokerage models that are used in the global forex market. The forex market does not have a physical location. Rather, it is a virtual market which is made up of a network of connected computers between all participating interests in the forex market.

The forex market is a tiered market which has a pyramidal structure. The top of the pyramid is headed by the major banks that serve as the liquidity providers in this market. These big banks are Credit Suisse, Citi, Barclays, HSBC, JP Morgan, UBS, Morgan Stanley, Deutsche Bank and Goldman Sachs. They buy and sell forex to each other and to other participants and therefore make prices at their level. These banks operate at what is known as the interbank market.

Other participants purchase forex from the liquidity providers. These participants include, but are not limited to the dealing and non-dealing desk brokers. Look at the structure of the forex market in the context of a supply chain, where there is a producer, a wholesaler, retailers and the consumers.

  • Producer of currencies — Central banks.
  • Wholesaler — The 8 big banks that act as liquidity providers.
  • Retailers — Dealing desk brokers (DD), non-dealing desk brokers (NDD), prime brokers, high/ultra-high net-worth clients (HNWIs and UHNWIs), hedge funds, commercial banks, finance houses, etc.
  • Consumer — Individual traders, BDCs, offline end-users such as tourists, small businesses.

If you can understand the forex market structure as outlined above, you would have made some progress in understanding how the DD and NDD brokers operate.

What is a Dealing Desk Broker?

Dealing desk brokers are also known as market makers. These brokers operate what is known as a dealing desk. Many people think it is simply a desk in an office, manned by one person who sits down and monitors what the clients of a firm are doing.

A dealing desk (DD) in a forex brokerage is a department that is dedicated to the matching and fulfillment of orders of their clients, using positions that have been acquired from the interbank market. In other words, a forex trader who trades forex with a dealing desk broker will have all pricing and order execution performed from the broker’s back end and not at the interbank market. The dealing desk is actually a fully staffed department responsible for taking and executing clients’ orders in a manner that constitutes minimal risk to the firm.

So how does this work? Typically, dealing desk brokers are clients of the big banks that operate the interbank market liquidity. You can look at the structure of the forex market outlined earlier for guidance. When the dealing desk brokers purchase liquidity from the big banks, they resell these positions to the individual traders. So whenever an individual trader places a buy order, this is fulfilled by the dealing desk with a sell order. When a sell order is placed by the individual trader, the dealing desk brokers offset this order by buying it. That way, the dealing desk brokers make the market and act as the counterparties to the trades of their clients. It is only when the orders are too large, or the trader’s positions are deemed to pose an excessive risk to the firm’s capital that the market makers transmit the orders to the liquidity providers for execution.

What is a Non-Dealing Desk Broker?

These are brokers in the forex market that do not fulfill the orders of their clients in-house, but rather transmit same to external venues for execution. These external venues could be the liquidity providers directly (so-called STP model), or to other prime brokers operating in the market who can absorb these orders (the ECN model).

These are the brokers that perform purely match-making activity in the FX market, pairing their clients’ orders to the liquidity providers that can fulfill them. They also provide specialist trading platforms that are built for such purposes for their clients.

What's the Difference?

The obvious differences between the DD and NDD brokers lie in the following areas:

A) Mode of operation

B) Compensation model

C) Pricing

D) Trade costs

Here is an explanation of the differences between the DD and NDD brokers.

Trade Conditions

Trade conditions refer to the conditions under which trades are conducted on a broker’s platform. Trade conditions include factors as who the counterparty is, whether or not there is a slippage/requote and the kind of trading platform you will be allowed to use.

As a trader, you are basically trading against the market maker because the dealing desk broker is the counterparty. With a non-dealing desk broker, you are trading against other traders in the interbank market because the broker is not participating in the process of fulfilling the order.

Slippages and requotes are very common when using dealing desk brokers. Why? Dealing desk brokers buy liquidity from the big banks; these must be used to fulfill clients’ orders at a profit. If the price shifts into territory that will make it unprofitable for the dealing desk broker to do this, the broker will not execute. Rather, new prices are offered or the trader is asked to requote.

Non-dealing desk brokers do not execute orders of their clients; they simply pass them on for external execution. So there is no impetus for NDD brokers to ask their clients to requote. The external executions are done mostly at the interbank market which can handle any volume of trades, so slippage does not occur.

Compensation Model

Dealing desk and non-dealing desk brokers make money from spreads. However, the spreads are fixed with a dealing desk broker under normal trading conditions (except when there is slippage). With a non-dealing desk broker, spreads are not fixed. You may pay a spread of 3 pips on a currency pair one minute, and a few seconds later, the spread may widen or narrow considerably. The writer has had to pay a spread that widened from 3 pips to 8 pips on a non-dealing desk broker when setting up a trade.

Pricing

Pricing is obtained solely from the market maker. This is usually at a small mark-up, which allows the broker to make a tiny profit on the position that has been acquired from the wholesalers (the liquidity providers). With non-dealing desk brokers, traders are served prices from as many as 8-10 liquidity providers. This allows the trader to choose the best bid/ask price that is suitable for such a trader.

Trade Costs

Traders who use market makers /dealing desk brokers typically pay a fixed spread with no commissions whatsoever. Traders who use non-dealing desk brokers pay a spread which is usually variable plus a commission on the entry and exit of all trades.

This site features a number of dealing desk and non-dealing desk brokers, which you can use for your trading activity. Feel free to make a choice of the model that works for you.